The midfielder has agreed a five-year deal with the Hornets after playing 58 times for the Ligue 1 side during the last three seasons.
Louza scored seven goals during the 2020-21 campaign for Nantes and helped them retain their top-flight status with an away-goal victory in their relegation play-off against Toulouse.
He made his final appearance for his boyhood club in the second leg on Sunday and will now swap Pays de la Loire for Watford.
Capable of playing in a variety of positions, including out wide or as a defensive midfielder, the left-footer predominately plays in the centre of midfield.
This is the third signing Watford have made since they secured an instant return to the Premier League, with young defender Mattie Pollock and forward Kwadwo Baah joining from Grimsby and Rochdale respectively last month.