The 23-year-old midfielder moves to Vicarage Road from Ligue 1 side Rennes for a reported fee of £8 million.
"The opportunity to sign Abdoulaye Doucouré now was one we wanted to act upon, given our long-standing interest in the player," CEO Scott Duxbury told the club's website.
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Doucoure made his debut for the Ligue 1 club in 2012 having come through their youth system.
The France U21 international has signed a four-and-a-half year deal with the Hornets but will go on a six-month loan to Granada CF, who are also owned by the Pozzo family.
Watford have also signed 18-year-old forward Adalberto Penaranda from Udinese, another Pozzo club. He was on loan to Granada, and will stay on loan at the Pozzo-owned Spanish club until the end of the season when he will link up with Watford.
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