Former Spain youth international Femenia, 26, started his career as a winger and has had spells at Barcelona B and Real Madrid B.
Austria Under-21 goalkeeper Daniel Bachmann has also joined the Hornets from Stoke City.
The 22-year-old, who spent six seasons with the Potters, has signed a three-year deal at Vicarage Road.
Find all the latest football transfers on our dedicated page.
Watford have signed right-back Kiko Femenia from Alaves on a four-year deal.