The 30-year-old defender has scored three times in his 61 appearances for the Hornets since joining from German club Werder Bremen in the summer of 2015.
Prodl was awarded the club's Player of the Season award for 2016-17 and has played twice in the Premier League so far this season.
"I am very pleased to sign a new deal at Watford," said Austria international centre-back.
"I hope to be back on the pitch soon and am looking forward to the next four years."
The defender is currently recovering from a knock he picked up during Austria's 1-0 defeat to Wales during the last international break.