The England Under-21 international has penned a one-year extension to keep him with the Hornets until 2013.
Loach was linked with a move to Tottenham during the January transfer window and he is thought to have attracted interest from a number of other Premier League clubs.
However, the 21-year-old has committed his future to the Championship side by extending his stay at the club.
Loach, who has already made 70 appearances for Watford, was delighted to end speculation over his future.
"Obviously, I'm delighted," Loach told the club's official website. "There has been a lot of speculation about me staying at the club but, at the end of the day, I want to play games and I'm only 21.
"I'm at a great club with a great young management side which I 'm sure will be here for a long time as well and if I can stay here while they develop and help me develop then it will be good.
"I want to continue to rack up games with Watford and that's all I ever wanted to do."