The 25-year-old failed to make the expected impact at Forest after a £950,000 move from Gillingham in 2003 and is the first of the five transfer-listed players to be offloaded this summer.
Watford boss Adrian Boothroyd told his club's official website: "His goalscoring prowess speaks for itself, better than a goal every three starts, and he's been the subject of two big-money moves during his career.
"But he's not had too great a time of things lately so I see this move as a chance to really show what he can do at this level."