The 41-year-old was appointed head coach of the Hornets in December 2020 and led them back to the Premier League courtesy of a second-place finish in last season's Championship.
Watford are currently 14th in the Premier League table, having picked up seven points from their opening seven matches of the 2021-22 campaign.
The Herefordshire outfit have only won one of their last six in the Premier League, though, and Saturday's 1-0 loss at Leeds United proved to be the final straw for the club.
"The board feels recent performances strongly indicate a negative trend at a time when team cohesion should be visibly improving," read a statement from Watford.
"The Hornets will always be grateful to Xisco for the part he played in securing last season's promotion and wish him well for his future career in football. No further club comment will be available until the imminent announcement of a new head coach."
Watford, who have had five managers over the last two years, will continue their 2021-22 campaign at home to Liverpool after the international break.