The 56-year-old joins Nigel Pearson’s backroom team with the Hornets six points from safety.
Shakespeare, who assisted Claudio Ranieri in Leicester’s 2015/16 title-winning season, is reunited with new Hornets boss Pearson.
The duo have worked together at West Brom, Leicester and Hull.
Shakespeare returns to football after being out of work since leaving Everton as a first-team coach in May 2018.
Pearson and Shakespeare face a challenge to preserve Watford’s top-flight status – the club have won just one of their 16 Premier League games this season.
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Pearson has officially taken charge of Watford this week after watching his new side from the stands in Saturday’s goalless draw with Crystal Palace.
Watford Under-23 boss Hayden Mullins, who oversaw the home draw against Palace, believes Pearson has a ‘very good’ squad to work with.