The Italian was brought in to replace Quique Flores last summer and he has become just the third Hornets boss to keep the club in the Premier League.
However, the 55-year-old will depart Vicarage Road after Sunday's match with Manchester City as a result of discussions with the club's owners.
Chairman Scott Duxbury said in a statement: "After the Board discussed with Walter Mazzarri the club's future goals and aspirations, it was decided he will be stepping down from his position as the club's Head Coach after the final game of the 2016/17 season.
"We thank Walter and his staff for the contribution they have made to Watford Football Club over the past year."
While Watford have not been in immediate danger of relegation this season, they will fall short of the points total achieved during the last campaign, which also included a run to the FA Cup semi-finals.
It has also been suggested that Mazzarri's failure to learn English is a contributory factor to his exit from the club.
Mazzarri has won just 12 of his 40 matches in charge, with all but one of those victories coming in the league after early exits in both domestic cup competitions.