The former Manchester United midfielder has been on loan at Walter Mazzarri's side this season, making 20 appearances in all competitions.
And the 27-year-old is thrilled to have secured a permanent move to Vicarage Road on a five-year deal after the club exercised an option on a transfer.
"I'm delighted," he told Watford's official website. "I think I made it clear I had feelings for the club when I came down here on loan and it was always the view to sign a permanent deal, so I'm over the moon.
"I felt part of the club from day one of the loan but now I really feel this is home and hopefully it is for a very long time."
Watford CEO Scott Duxbury said: "We're very pleased to secure Tom's signature. I believe it's a sign of our ambition to recruit the highest calibre of player for Watford.
"Tom's affinity with the club and supporters has been very clear from the moment he returned, and we now look forward to seeing him in a Watford shirt for many years to come."
Cleverley was named Watford's Player of the Season at the end of a loan spell in the 2009-10 campaign, in which he scored 11 goals in 35 appearances.
Watford face rock-bottom Sunderland on Saturday looking for a win to at least maintain their six-point gap to the Premier League relegation places.