Watford announced the deal on their website and said Capoue, 26, had signed a four-year contract. British media put the transfer fee at 5.7 million pounds.
Capoue joined Spurs from French Ligue 1 club Toulouse, where he played nearly 200 games, for a reported 9.3 million pounds in 2013 and made 36 appearances in all competitions, scoring twice.
However, he failed to secure a first-team place after falling out of favour with Spurs manager Mauricio Pochettino.
He has won seven international caps, scoring once.
Although Watford did not disclose the fee they said it was more than their previous record, reported to be 3.25 million pounds for Nathan Ellington from West Bromwich Albion in 2007.
Watford, who finished runners-up in the Championship last season, appointed former Atletico Madrid boss Quique Sanchez Flores as their fifth manager in a year last month.
They have already signed Czech Republic striker Matej Vydra, Lithuania goalkeeper Giedrius Arlauskis and Austria defender Sebastian Prodl for the new campaign.
Striker Troy Deeney, who scored 21 goals as the Hornets secured automatic promotion last season, extended his contract until 2020 after centre backs Gabriele Angella and Craig Cathcart signed new four- and five-year deals respectively.
(Editing by Ken Ferris)
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