The 25-year-old joined the Club in a £1.5 million deal and on a three-and-a-half year contract, which runs until 2019 .
He can play in a variety of positions across the front line and will wear the number seven shirt.
Fabbrini returns to Blues following a successful loan period at St. Andrew's last season.
He joined Blues on an emergency loan in late March 2015 and went on to make five appearances, with his last start coming in Blues' 1-0 win away at Bolton Wanderers on the final day of the 2014/15 campaign.
Most recently Fabbrini has been at current Sky Bet Championship Middlesbrough on loan, where he made a total of 26 appearances and scored six goals.
A full Italian international, with one cap to his name, Fabbrini, began his career in his home country with Empoli, before joining Udinese and then making the switch to Watford in 2013.