Silva left Hull following their relegation from the Premier League at the end of the season, and replaces Walter Mazzarri at Vicarage Road.
Although the Portuguese was unable to save Hull from the drop, Silva impressed during his five months in charge of the Tigers and had been linked with vacancies at Porto and Crystal Palace.
Watford chairman Scott Duxbury said on the club's website: "Marco was one of the most sought-after head coaches in the Premier League.
"His pedigree and promise speaks for itself, with his achievements in top divisions elsewhere across Europe as well as his work at Hull City last season.