The 35-year-old is well known to the Vicarage Road faithful after spending two consecutive seasons on loan with the Hornets from Manchester United during the 2005-06 and 2006-07 campaigns.
In those seasons he helped Watford to promotion to the Premier League and was their starter in goal for their 2006-07 top-flight campaign, though the club finished bottom of the table and was relegated.
He returned to Manchester United, where he was used sparingly over the next three seasons, before a one year stint at Birmingham City ahead of his eventual move to West Brom.
Foster - who has been capped by England eight times - featured in all but one of West Brom's Premier League games last season as they suffered relegation to the Championship.
He has made an immediate return to the top flight, however, with Watford holding an option over an additional 12-month contract should the goalkeeper impress.
Foster is Javi Gracia's second signing of the day after Sweden international Ken Sema arrived from Ostersunds.
The 24-year-old joins on a five-year deal after he racked up 58 league appearances during two-and-a-half years with the Swedish top-flight side and has won five caps for his country, though he did not make their World Cup squad.
The pair join Gerard Deulofeu, Marc Navarro, Adam Masina and Ben Wilmot as Watford's signings ahead of the new campaign.