Previous boss Malky Mackay departed to become Cardiff's new boss last Friday and Watford have promoted former Hornets defender Dyche from his position as assistant manager.
Club owner Laurence Bassini said: "I'm delighted that the board - Graham Taylor, Stuart Timperley and David Fransen - have been able to add their experience and influence to the decision to appoint Sean as our new manager."
Chairman Taylor added: "I fully endorse Sean's appointment. It's very good news for Watford Football Club. Continuity is imperative. In Sean, we have a very decent man who understands what it means to work for Watford.
"He's a strong advocate of the importance of our homegrown talent flourishing, having been youth-team coach only a couple of years ago."
Dyche started out as a player at Nottingham Forest before a long spell at Chesterfield and had stints at Bristol City, Luton and Millwall before moving to Watford as captain in the summer of 2002.
He then spent two years as player and coach at Northampton before being appointed Hornets youth-team coach in 2007.
Source: PA
Source: PA