The 22-year-old impressed as England reached the semi-finals of the recent European Under-21 Championship and has signed a five-year contract with the Hornets.
Chalobah spent the 2012/13 campaign on loan at Watford and had been expected to agree a new £60,000 (68,000 euros, $78,000) a week deal with Chelsea, but the lure of more first-team football proved decisive.
The Sierra Leone-born Chalobah, also a member of the England Under-17 side that won the 2010 European Championship, spent most of his Chelsea career out on loan including spells at Serie A side Napoli and Burnley.
Chalobah can operate in midfield or defence and played 10 times for Chelsea in their Premier League title-winning campaign last season.
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