"Fans want to see players give 100 per cent and that’s the minimum I’ll give," Hughes told the club's official website.
"[Palace are] planning for the future and it’s exciting times ahead. They’ve got a big project going on here so it’s exciting to be part of it.”
Hughes, 26, made his Premier League debut in 2017 and helped Watford maintain top-flight status for three seasons.
The English midfielder has made 77 appearances in the competition, scoring five goals and assisting a further eight.
In the Championship he was directly involved in 28 goals in 195 matches for Watford and Derby County combined.