The Frenchman's contract length has not been disclosed.
Ismael comes in as a replacement for Chris Wilder, who departed Vicarage Road at the end of the Championship season.
Watford finished 11th, missing out on a play-off place.
Ismael is the 19th different full-time manager Watford's Pozzo family owners have appointed since taking over the club in 2011.
On the appointment, Watford technical director Ben Manga said: "Being able to appoint a new coach so soon in May means we can prepare very well together for next season.
"To be able to welcome someone of Valerien's experience to Watford is good news for our club. We are all looking forward to working with him."
“The Hornets would like to place on record their thanks to Chris Wilder and his staff, whose short-term contracts have come to an end,” a club statement read.
“His 11-game spell began in March and finished after the season’s final-day win at home to Stoke City. We wish Chris, Alan Knill, Matt Prestridge and Mike Allen all the very best for their next opportunity in football.”
Ismael's former clubs include Wolfsburg, Barnsley and Besiktas.
