The 39-year-old replaces Nathan Jones, who left the Championship club last week after being appointed by Premier League side Southampton.
Edwards was appointed by Watford in May and sacked on 26 September after only 11 games in charge, winning three.
“From the outside, looking in at Luton Town, you see such a well-run football club,” he told the club website.
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“You can see it’s a club that puts its people and supporters first. I feel a lot of positivity around the place, and I’m really thankful to be given the chance to be part of it.
“Because of where I’ve just come from, it has probably added a difficulty to the decision for them, but I’m really pleased that they see past that and deem me as the right person to play a part in the next chapter of this club going forward.”
Following a playing career that began at Aston Villa and included spells at Wolves, Blackpool and Barnsley, Edwards retired at the age of 30.
He had two games in charge of Wolves as interim boss in 2016 and a season as AFC Telford boss before becoming head coach of England’s under-16 team.
Edwards was appointed by Forest Green Rovers in May 2021 and they went up as League Two champions last term, winning half of their 46 league games and losing only eight, prompting Watford to recruit him following relegation from the Premier League.
The two clubs are just 19 miles apart and their rivalry stretches back to 1921 when they faced each other in a league game for the first time.
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