The former England boss is set to be unveiled as Claudio Ranieri's replacement at Vicarage Road on Tuesday.
He has penned a contract until the end of the season and will be assisted by Ray Lewington, an ex-Watford manager.
Hodgson, who managed England from 2012-2016, was last in the dugout at Crystal Palace.
He departed Selhurst Park at the end of last season, after four years at the helm.
The 74-year-old has had a legendary career in management spanning more than 50 years, and counts Inter Milan, Blackburn Rovers, Fulham, West Brom and Liverpool among his former clubs.
He will now replace Ranieri at struggling Watford after the Italian became the second manager sacked by the Premier League club this season.
Ranieri, 70, signed a two-year deal at Vicarage Road in October, replacing Xisco Munoz with the side 15th, having taken seven points from their first seven Premier League games.
But he only managed to double that points tally during his 13 top-flight matches in charge and was relieved of his duties after just 112 days.
The Hornets languish in 19th place in the Premier League and sit just two points above bottom-placed Burnley, who have two games in hand on the Hertfordshire side.
Hodgson, who was replaced by Patrick Vieira in 2021 after four years at Palace, believes he can be the man to steer Watford to survival.
The ex-West Brom and Liverpool boss worked under Watford's Italian owners at Udinese in 2001.
His long-term number two Lewington bossed the Hornets from 2002-2005 and has agreed to return to the club to assist Hodgson.