Garcia – formerly of Brighton and Hove Albion and Maccabi Haifa – will replace Beppe Sannino in charge at Vicarage Road.
Sannino resigned on Sunday after just eight-and-a-half months at Watford.
Garcia was said to be a target for Leeds United, who are also seeking a new head coach despite the season still being in its first month.
But Watford said they had beaten "several high-profile English clubs" to capture Garcia.
A club statement confirmed the deal and read: "Watford Football Club is delighted to confirm the appointment of Oscar Garcia as head coach, the Hornets having won the race against several high-profile English clubs to secure his services.
"Oscar's recent Championship experience – taking Brighton and Hove Albion into last season's Championship promotion play-offs, was a key factor in his appointment.
"This achievement came after coaching career highlights which include leading Israel's Maccabi Tel Aviv into the UEFA Champions League thanks to a 2012-13 league title-winning campaign.
"Everyone at Vicarage Road extends their best wishes to Oscar for his new role, which he takes up with immediate effect."
Watford have made an excellent start to the season, winning four of their five Championship matches to sit second in the table – just one point behind Nottingham Forest.