Ranegie, a Swedish international striker, signs for the club on a four-and-a-half year deal while 21-year-old Merkel, a former German youth international, signs on loan until the end of the season.
Standing at 6ft 5in, Ranegie adds some height to the Watford attack and played for a number of clubs in Sweden before moving to Udinese in 2012.
Merkel moved to Germany from his native Kazakhstan as a child before becoming a part of AC Milan's youth setup as a 16-year-old.
The midfielder is a German youth international and played for Serie A side Genoa before signing a long-term contract with Udinese at the start 0f 2013.
Merkel has received international clearance for Merkel but he will not feature in Watford's FA Cup tie away at Bristol City. The club are still awaiting international clearance for Ranegie.
Watford's owners, the Pozzo family, also own Serie A side Udinese and La Liga side Granada. With the two latest arrivals, Watford have now signed a total of 13 players from Udinese and Granada this season.