The 32-year-old returns to the Premier League five years on from his single season at Upton Park, and is an immediate boost to boss Quique Flores' forward line.
The 17-cap Italy forward spent time on loan at Fiorentina earlier this year, but now returns to English football after spells with Brescia and Bologna.
Watford have opened their Premier League campaign with two straight draws, the Hornets unable to break the deadlock despite dominating their goalless battle with West Brom on Saturday.
Manager Flores later admitted securing new striking options were among his top transfer window priorities, and Diamanti should now be in contention to feature against Southampton on Sunday.
Watford's Spanish boss will be hoping Diamanti can help provide the kind of service that can move striker Troy Deeney off the Premier League goal mark.
Deeney has drawn a blank on his first two top-flight outings, but Flores insisted after Saturday's West Brom clash that the 27-year-old will come good.
"Troy is involved but it was difficult (for the other players) to get connected with him," said Flores, reacting to the West Brom draw.
"There were a lot of players around Troy which is why we tried to play down the sides and put crosses in.
"West Brom put a lot of players inside the box but Deeney is connecting with the team
He is one of the leaders of the side.
"I have no doubts about Troy and I would not be surprised if he scored in the next game."
Chelsea youngster Nathan Ake - another Watford loan recruit - believes boss Flores will help accelerate his development.
The 20-year-old signed a new five-year Chelsea deal last week, joining Watford on loan at the same time.
Now the Holland Under-21 star hopes to make rapid progress at Vicarage Road.
"He's a big manager and he has managed big clubs," Ake told Watford's official website of boss Flores.
"He told me he had young players when he was at other clubs, like Koke at Atletico Madrid, and he said age doesn't matter to him, he'll play you if you're ready.
"I was really impressed with him, we had a good chat and he made me feel welcome straight away."
Source : PA
Source: PA