The 47-year-old will take over from Marco Silva, who was dismissed earlier on Sunday following a run of just one win in 11 Premier League games.
Gracia will be charged with arresting an alarming slide that has seen Watford go from European contenders to a relegation fight.
The former Malaga boss boasts a wealth of experience, having claimed successive top-10 finishes during his time in charge on the Costa del Sol, before a spell in charge at Russia side Rubin Kazan.
Watford current find themselves 10th in the Premier League, just four points above Southampton in 18th.
21 January 2018