Gracia replaces Jesse Marsch, who was sacked on Feb. 6 following seven games without a win in the Premier League.
"Leeds United are delighted to announce the club have agreed terms with Javi Gracia to become men's first team head coach, subject to obtaining a work permit," a club statement read.
The club confirmed that the Spaniard has agreed to sign a "flexible contract."
Leeds, who have since failed to win in three subsequent games under the caretaker charge of Michael Skubala, are now 19th in the table ahead of Saturday's game against Southampton.
Gracia, 52, has been out of work since leaving Al Sadd last year. He has also managed Malaga, Rubin Kazan and Valencia. During his time at Watford, he led them to the 2019 FA Cup final, which they lost 6-0 to Manchester City.
Carlos Corberan was linked with the position at Leeds before signing a new deal at West Bromwich Albion. The club also had interest in Rayo Vallecano's Andoni Iraola and ex-Ajax boss Alfred Schreuder.