Watson will be 65 when the matches are played at Gleneagles in Scotland, making him the oldest captain in Ryder Cup history, surpassing John Henry Taylor, who was 62 when he captained Great Britain to victory in 1933.
"I was waiting 20 years to get the call again. I loved it the first time," said Watson, who led the U.S. to victory in 1993 in his previous stint as captain.
"I've been a great fan of the Ryder Cup, always been watching, I get the same gut feeling just watching it at home on TV. It's a great honour to do it again."
Watson has previously been critical of Tiger Woods but the former world number one was among the first to applaud his appointment and declare his availability.
"I'd like to congratulate Tom Watson on his selection as Ryder Cup captain," Woods said in a statement released within minutes of the announcement.
"I think he's a really good choice. Tom knows what it takes to win, and that's our ultimate goal. I hope I have the privilege of joining him on the 2014 United States Team."
A winner of eight majors, including five Open Championships, Watson became just the seventh man to be named U.S. captain on more than one occasion. The last was Jack Nicklaus in 1987.
"Tom Watson is one of the most respected players and ambassadors in the game of golf, and the PGA of America is excited that he has accepted the task of once again guiding a United States Ryder Cup Team," PGA of America President Ted Bishop said.
"The 40th Ryder Cup at Gleneagles will mark 21 years since the U.S. has won a Ryder Cup on foreign soil. Tom was the last American captain to accomplish this feat and we hope that he can do it again."
In a break from tradition, the PGA of America made the announcement on national breakfast television, the NBC's "Today" show.
Watson, who succeeded Davis Love III as captain, appeared live on the show and then held a news conference near the top of New York City's Empire State Building.
In recent years, the U.S. has picked a new captain for each Ryder Cup, usually aged between 40 and 50, with David Toms and Larry Nelson mentioned as possible candidates.
But the PGA said it wanted to try something different after losing seven of the last nine Ryder Cups, including the most recent, just over two months ago in Chicago, when the Americans threw away a commanding four-point lead heading into the final day, which became known as the meltdown at Medinah.
"I've lived for that pressure, lived underneath that pressure all of my career and I just hope I can set the table for these players to go out," said Watson.
"I'm a stage manager, I set the stage for them and they go out and perform their act and in two years I hope that we can get it done."