The Hornets have won one of their last 11 top-flight games and are 10th in the Premier League.
In a statement today, Watford said: "This has been a hard decision and one not taken lightly".
Watford have sacked manager Marco Silva, just eight months after taking charge at Vicarage Road.More news: Congress shuts down the government. Now what?
The Hornets refer to an "unwarranted approach by a Premier League rival" in their official statement on Sunday, suggesting that Everton were at least partly to blame for the downturn in form.
Watford said Everton's approach for Silva had been "the catalyst" for this decision.
The Watford board believe trust between the players and head coach has been lost because of Silva's desire to move to Goodison.
I understand that Watford have already spoken with a number of foreign-based coaches including ex-Rubin Kazan chief Javi Garcia, whilst their former boss Slavisa Jokanovic - now at Fulham - has also been in their thinking.More news: Leicester rival Manchester City in battle for Jonny Evans
After bringing in signings such as Richarlison, Tom Cleverley, Will Hughes, Nathaniel Chalobah and Andre Gray for a combined total of £51.75 million, the expectation for Silva to succeed was high.
'The Club will seek to make a swift appointment and there will be no further comment until that appointment has been made'.
Everton appointed Sam Allardyce after both approaches for Silva were rebuffed and now sit two points above Watford in ninth.
Watford have not won in their last five Premier League games and lost 2-0 on the weekend to Leicester, the Hornets are now sitting in tenth place in the Premier League Standings.More news: Rian Johnson defends controversial The Last Jedi moment
Their next fixture is away to Southampton in the FA Cup fourth round next Saturday.