The Australia defender will spend the rest of the Championship season at Vicarage Road after impressing during a week's training with the club.
Neill has been a free agent since leaving Japanese club Omiya Ardija in December and was this week linked with a move to Sydney Olympic in his home country.
But the 35-year-old has instead opted to make Watford his fifth English club following earlier spells with Millwall, Blackburn, West Ham and Everton.
He told the Watford website: "I want to add my experience to the Watford squad and I'm hoping that some of my natural leadership skills can benefit the group here.
"I'm highly motivated to keep playing. There's still a huge passion within me for football. I've had experience in different territories across recent years.
"I've spent 14 years of my career in England and my family are based here. I took up challenges in different countries because I wanted some new experiences - but this is a great chance for me to play at an excellent level and help Watford finish the season as strongly as possible."
Neill has not given up hope of playing in a third World Cup finals tournament this summer, and Australia boss Ange Postecoglou has warned he will only consider players featuring regularly at club level.