The Australian international, 36, retired last year after a short spell with Melbourne Heart and embarks on his first major coaching role with the Premier League newcomers.
Kewell has established his own youth academy back in Australia, where he also represented Melbourne Victory after leaving Galatasaray.
Watford’s sporting director Luke Dowling said: “We are delighted that Harry has agreed to join us as our new U21 coach.
“Harry enjoyed an extremely successful career as a player, and he now has a proven track record when it comes to working with and nurturing gifted young footballers.
“His knowledge and experience will be of great benefit to the club’s youth set-up as a whole, and the talented players we have within our U21 group.”