The versatile 20-year-old can play in midfield or defence and becomes Watford’s 11th signing of the summer.
He arrived at Stamford Bridge in July 2011 and lifted the FA Youth Cup in his first season, before winning the club’s Young Player of the Year award for 2012-13.
First-team appearances have, however, proven few and far between for the Dutchman, who has featured just 12 times for Chelsea, including a substitute appearance against Watford in the FA Cup in January.
Ake spent a month on loan at Reading in March and played five times for the Royals in the Championship.
Watford have already added 10 players in this transfer window and are close to signing former West Ham forward Alessandro Diamanti, who has been training with the club.
Ake has also represented the Netherlands at every youth level, and captained the U17 and U19 sides.