The Iceland striker was allowed to leave Championship rivals QPR and Hornets boss Malky Mackay was quick to snap him up.
Helguson, 32, hit 64 goals in five years with Watford and added two more to his tally when he made a memorable return as a substitute in Saturday's 3-3 draw with Leicester.
He said: "The people I already knew here, (coaches) Sean Dyche and Alec Chamberlain, made a difference in my decision to come back.
"Without them I would have had to think things through a bit more. But it was an easy decision in the end and it's really good to be back."
Meanwhile, Helguson is undergoing an MRI scan to determine the extent of the calf injury he sustained on Saturday.
The Iceland striker is a doubt for this weekend's trip to Reading after leaving Vicarage Road on crutches following the dramatic draw.
Boss manager Malky Mackay told the Watford Observer: "We are going to have Heidar scanned to find out what sort of damage there is.
"We are working extensively with him to try to get him ready for the weekend but we will know further after his scan."