The defender, a Northern Ireland Under-21 international, has spent the first half of the season with the League Two club, making 11 appearances.
Thompson's agreement came to end after last weekend's 4-1 FA Cup victory over Millwall but Shrimpers boss Phil Brown has wasted little time bringing him to the Essex club on an 18-month contract.
"He really showed against Millwall what he was all about so we're pleased to have him here now for 18 months," Brown told the club's official website.
"There was other clubs interested in Adam but he made it clear this is the place he wanted to be to continue his development as a footballer.
"I'd like to thank Watford for allowing him to come on loan to us in the first instance. I'm pleased we were able to get this deal over the line."
Thompson rose through the ranks at Watford and made 16 first-team appearances while also enjoying loan spells at Brentford, Wycombe and Barnet.
He added: "I've thoroughly enjoyed my time with Southend and it's the best I've ever felt in my career.
"I knew quite a while ago that I would be really interested in joining the club on a permanent basis so I'm delighted it has happened.
"It's really important for my progression that I work as hard as I can to become a regular in the team and help Southend achieve promotion this season."