The Algeria international, 24, becomes the latest player to arrive at Vicarage Road from either the Spanish club or Udinese, who are both controlled by Watford's owners the Pozzo family.
Gianfranco Zola's Hornets boast an option to snap up Belkalem on a permanent deal at the end of the season.
Having initially linked up with the Hertfordshire club last week, Belkalem watched Saturday's impressive 6-1 demolition of Bournemouth from the stands.
He becomes the 12th player this summer to sign for Watford from either Granada or Udinese, and the first loanee after all previous arrivals were on permanent deals.
It comes after Watford's policy last season of loaning in a raft of players - as many as 14 - from their two overseas sister clubs attracted a host of headlines, resulting in the Football League closing a loophole which did not put a limit on the number of loans available from foreign clubs.
The Hornets - who lost last season's Championship play-off final at Wembley - have enjoyed a 100 per cent start to the new campaign, winning both of their league matches and also progressing in the Capital One Cup.