New owner Giampaolo Pozzo had announced that Zola was set to take charge of the Championship club on a two-year contract, with last season's manager Sean Dyche sacked earlier in the week.
The Pozzo family own Serie A club Udinese and Spanish overachievers Granada.
"Everyone knows how Gianfranco Zola likes football to be played," Watford technical director Gianluca Nani told the club's official website. "I think Watford's fans can expect an exciting and attacking style from his team. Gianfranco represents this project perfectly."
Former Italy forward Zola, 46, had a glittering playing career with Chelsea, Parma and Napoli and was in charge of the Hammers for two seasons before he was surprisingly sacked in 2010.