The 29-year-old attacker had spent the last year with the Serie A outfit, having departed West Ham, but is now back in the Premier League after signing for the Vicarage Road outfit for an undisclosed fee.
The Hornets will hope that he can show the kind of form that he mustered at West Ham, with whom he registered seven goals in 29 appearances.
Zarate had found his opportunities to shine limited with Fiorentina this season, playing only nine matches with the Viola. However, he found the net on each of his last two appearances for the Florence club, striking the consolation in a 3-1 loss against Lazio before helping his side to draw 3-3 with Napoli before Christmas.
The forward, who won the Coppa Italia at Lazio in 2009, will compete with the likes of Troy Deeney, Isaac Success and Roberto Pereyra for a place in the Watford attack. Striker Odion Ighalo has been heavily linked with a move to West Brom.