Dyche spent last season as assistant manager last season and owner Laurence Bassini has now promoted the former defender to the hot seat at Vicarage Road with the backing of Graham Taylor, Stuart Timperley and David Fransen,
The former Watford captain took over as assistant manager in the summer of 2009 following the permanent appointment of Mackay and he has impressed the Watford board.
"I'm delighted that the Board - Graham Taylor, Stuart Timperley and David Fransen - have been able to add their experience and influence to the decision to appoint Sean as our new manager," Bassini told the club's official website.
"For me, this appointment is very much in keeping with 'The Watford Way' of doing things - and that's an ethos I'm growing more familiar with as time goes on.
"It's important we've appointed someone who has a real feeling for what this club is about. I'm very glad we've been able to reach this point now.
Former England manager Graham Taylor welcomed the decision to install Dyche as manager of Watford and the Hornets chairman believes Dyche is the right man to take the club forward.
"On behalf of the Board, I fully endorse Sean's appointment. It is very good news for Watford Football Club," said Taylor.
"Continuity is imperative. In Sean, we have a very decent man who understands what it means to work for Watford.
"He is a strong advocate of the importance of our home-grown talent flourishing, having been youth-team coach only a couple of years ago."
