The newly-promoted Premier League side have the option to make the move permanent at the end of the 2021/2022 season.
Tufan has been with Fenerbahce since 2015, having joined them from Bursaspor.
The 26-year-old has already featured once for Fernerbahce in the Turkish top flight this season but joins Watford’s bid to consolidate their place in the Premier League after suffering relegation last time out.
Confirming a deal on the club's official website, the Hornets said: "Watford FC is delighted to announce the signing of Turkey international midfielder Ozan Tufan from Fenerbahce, on a season-long loan with an option to buy.
"The 26-year-old arrives with nearly 10 years of top-flight experience in his home country as well as 63 Turkey caps to his name.
"Tufan’s career began with Bursaspor before he moved to Super Lig rivals Fenerbahce in 2015, where he has since made 174 outings while also spending a loan spell at Alanyaspor.
"A holding midfielder with a range of passing and an eye for goal, the Hornets have beaten a host of Premier League and European clubs to Tufan's signature.
"Welcome to Watford, Ozan!"
Watford began the season with a 3-2 victory over Aston Villa and are away to Brighton and Hove Albion this weekend.
