The 46-year-old takes over at the Championship side as his second venture into management begins, with the club's technical director expecting an "exciting" brand of football
The announcement comes as little surprise after new owner Giampaolo Pozzo announced on Monday that the Italian would take charge of the Championship outfit following a verbal agreement with the 46-year-old.
The club sacked Sean Dyche, who had been in charge of the club since June 2011 and managed to lead the club to its highest finish in five seasons (11th), last week to pave the way for Zola's arrival.
Zola has two years managerial experience at the top level, having been West Ham boss from 2008-10 when they were in the Premier League, where they have just returned.
He was praised for an attractive style of football at the east London club, while also being hailed for integrating the youth set-up into the first team.
However after finishing just five points above the relegation zone in his second season, the former Blues man had his contract terminated.
The board is hoping he can bring a free-flowing attacking style of football to the team, while insisting the ex-Italy international is a good fit for their vision.
"Everyone knows how Gianfranco Zola likes football to be played," Watford's Technical Director Gianluca Nani told their official website. "I think Watford's fans can expect an exciting and attacking style from his team. Gianfranco represents this project perfectly."
Follow GOAL.COM USA on