Eustace is one of the Hornets' longest-serving players, having moved to Vicarage Road from Stoke City in January 2008.
However, the 33-year-old made just two league starts last season and he now wants to move on in search of regular game time.
"Watford wanted John to stay with the club in some capacity, but John wants to continue playing," agent Colin Gordon told the Watford Observer. "Gianfranco Zola really likes him as a bloke and really wanted him to stay around the place and everyone who knows John knows he will make a top manager one day.
"But he wants to continue playing - he wanted assurances about playing time and things like that and Watford couldn't give him that.
"It's disappointing we couldn't come to an agreement and that it's petered out in this way, but the club have been very fair with us and we part on good terms."
Eustace has made 168 appearances for Watford, scoring 16 goals.