Gracia paid the price for Watford’s poor start to the season on Saturday by becoming the first Premier League managerial casualty of the campaign.
Watford have picked up just one point from their first four Premier League games following losses to Brighton and Hove Albion, Everton and West Ham United.
Gracia led Watford to a respectable 11th place finish last term, and also guided them to only their second ever FA Cup final, where they lost 6-0 to Manchester City.
Watford chairman Scott Duxbury said: "Javi has represented Watford with great dignity and will always be deserving of our fullest respect for his achievements."
A club statement added: "Everyone at the Hornets wishes Javi and his staff all the very best for the future, and they will always be welcome visitors in the future at Vicarage Road."
Quique Sanchez Flores has previously spent time at Vicarage Road, leading Watford to 13th place and the semi-finals of the FA Cup in the 2015/2016 season, but departed the club following disagreements with the board at the end of the season.
Flores counts Spanish giants Atletico Madrid as one of his former clubs as he led the Rojiblancos to the Europa League and UEFA Super Cup titles in 2010.
Flores’ first game on his return will be at home to Arsenal after the international break.
