The 32-year-old joined the Hornets from Wigan Athletic in January 2015, going on to make 78 appearances for the club during his three-year stay at Vicarage Road.
Watson has made just 11 appearances for Watford so far this season, though, and has seen his contract terminated at the club by mutual consent.
"Watford FC can confirm that Ben Watson has left the club having been released from his contract by mutual consent," read a statement on the club's official website.
"The Hornets would like to thank Ben for his service to the club and wish him all the best for the future."
Watson is now expected to complete a move to Championship side Nottingham Forest on Thursday.