The former Leicester City manager succeeds Quique Sanchez Flores, whose short-lived second spell at Vicarage Road was brought to an end last weekend after defeat to Southampton.
Pearson has signed a contract initially until the end of the season, Watford revealed on its website.
The Hornets sit bottom of the Premier League with eight points from 15 matches. Pearson, 56, becomes their third head coach of the campaign, after Javi Gracia and Flores.
Watford chairman and chief executive Scott Duxbury said: "Nigel is an impressive coach and comes with all of the experience and success we believe can have a very positive impact on our season.
"It's been a pleasure spending time listening to the passion with which he talks about the game. His enthusiasm, organisation and motivation will I'm certain prove essential in driving the team forwards and upwards over the coming weeks and months."
Former England Under-21 boss Pearson previously managed Leicester in the top flight, in the second of his two spells with the Foxes, and has also had stints in charge of clubs including Southampton, Derby County and Hull City. His last job was with OH Leuven in Belgium.
Pearson will be presented to Watford's supporters at Sunday's (AEDT) home game against Crystal Palace, but the team will be managed by interim boss Hayden Mullins.