The 33-year-old was a free agent after parting company with the Hornets earlier this summer.
Eustace, who spent the final two months of the 2008/09 season on loan at Pride Park from Watford, has featured in three pre-season friendlies for Derby against Bohemians, Port Vale and Bristol Rovers.
He becomes the Rams' fifth new signing following goalkeeper Lee Grant, left-back Craig Forsyth and strikers Chris Martin and Johnny Russell.
Derby manager Nigel Clough told the club's official website: "We're very happy to sign John and it's no secret we've tried to bring him here permanently on a few occasions in the past.
"He's got good experience and he's a type of player we haven't had in the squad for a while, so he'll be vital both on and off the pitch.
"He'll be very good for our midfielders as well, he's got bags of experience and that'll only help them improve as players too."
Eustace added: "I want to play as much as I can and help out the team, and to ensure this club is part of the promotion push.
"There are some fantastic young players here and I cannot see any reason why we cannot be pushing at the top end of the table."