Gracia has quit the Hornets today after defeat to Swansea City on Saturday. He was only named manager three months ago.
The Spaniard called for a meeting with club owner Gino Pozzo following Saturday's loss, saying the team were in a "very difficult moment".
"We retain the belief Javi was the right man to lead the club towards its push for promotion, but Javi felt he no longer had the motivation and was not the right man to continue coaching this exciting group of young players," a club statement said., external
"We respect his decision and accept his wish to leave Vicarage Road with immediate effect."
Gracia leaves Watford sitting in tenth place on the Championship table.
Charlie Daniels, Dan Gosling and Adrian Mariappa are set to take over the reins for the trip to face Hull City on Tuesday.