The 19-year-old has returned to the U's on a free transfer after playing eight games during a loan spell last season.
Massey made nine appearances as a substitute at Vicarage Road but has seen his first-team opportunities limited following the appointment of Gianfranco Zola as manager and the arrival of eight summer signings.
Us boss John Ward said: "Gavin is young enough to develop further and we saw a lot of promise last year in his play.
"He can now settle himself down and develop that promise into something more formidable.
"Things have changed a lot at Watford over the past few months and so we made an enquiry about his services and have now come up with this deal."