The 22-year old striker joins the Hornets permanently from Udinese after arriving on loan in the summer and is delighted to have committed himself at Vicarage Road.
"I'm unbelievably happy to be signing for Watford," Forestieri said. "I have enjoyed the town and the club so far, as well as the support of the fans.
"Life feels good at Watford and it feels like home. I love working with people here and I feel protected.
"I would like to thank Lucas (my agent), as well as Gianluca Nani, Scott Duxbury and the staff from Watford for their help and support.
"I will give my heart for the club."