The 29-year-old attacker has moved to the south coast after the two clubs agreed a fee thought to be in the region of £1.8m.
Smith played more than 170 times for Watford during two spells at Vicarage Road, finding the back of the net 50 times for the Hornets.
He becomes the sixth player to move to Fratton Park this summer, but he is the first to command a fee.
Aaron Mokoena, Steve Finnan and Antti Niemi all joined Pompey on free transfers, while Frederic Piquionne and Anthony Vanden Borre both moved on loan.
"I spoke to Paul Hart and it sounded brilliant," he told the club's official website.
"Everything down here is certainly what I was looking for and I'm sure I've made the right decision.
"The supporters here are well renowned for being fantastic, loyal and very, very noisy. When I've played here the atmosphere's been electric and it'll be nice to be on the right side of them this time."
Pompey manager Hart said: "I've liked Tommy for a long time. He's clever, infectious, enthusiastic and a hard worker.
"He can play as a centre forward, behind the centre-forward or out wide, so he covers a lot of positions. He's going to be a great asset to us."
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