"I'm highly motivated to keep playing," Neill told Watford's official website. "There's still a huge passion within me for football.
"I've had experience in different territories across recent years. I've spent 14 years of my career in England and my family are based here.
"I took up challenges in different countries because I wanted some new experiences - but this is a great chance for me to play at an excellent level and help Watford finish the season as strongly as possible."
Neill was recently linked with a return to Blackburn and also reportedly held talks with Australian side Sydney Olympic.
He is set to travel to Brazil for this summer's World Cup, where Australia have been drawn in a difficult group with defending champions Spain, the Netherlands and Chile.