According to Sky Sports, the Hornets paid an initial £5m for the 22-year old, but the fee could rise to £7m if bonuses are met.
Chalobah spent the 2012-13 season on loan with Watford, scoring 5 goals in 42 appearances.
Last season, Chalobah made 15 appearances for Antonio Conte's side, but with the imminent arrival of Tiemoue Bakayoko, the Italian couldn't guarantee the England U21 international playing time next season.
Chalobah will wear squad number 14 for #WatfordFC
Welcome back, @chalobah!
— Watford FC (@WatfordFC) July 13, 2017