Hornets boss Adrian Boothroyd is delighted to add him to his squad.
"He's got that potential to score goals from midfield so he really will add depth and difference to our squad," said the former Leeds coach to Watford's official website.
"I'm delighted to welcome him to Watford as he's another player who fits the new culture here, hungry and with a point to prove in the game. I've talked before about getting the right type of character to this club. I know Matthew will very much fit that mould, having worked with him at Leeds last season."