The former Scotland international was installed at Vicarage Road only days after joining the coaching team, with Oscar Garcia taking time off to rest following a recent health scare.
He said: "In accepting the head coach position at Watford, I recognise I've got to concentrate my efforts solely on this club role, so it is with regret that I'll be stepping down from the assistant manager position with Northern Ireland.
"I am very grateful to both the Irish FA and to Michael O'Neill, who I've known since the early part of my playing career, for the opportunity to serve Northern Ireland but there is no question in my mind that my attention must be fully on bringing success to Watford FC.
"It's been an honour and a privilege to work as part of an international coaching structure. I wish Michael, the staff, players and everyone else connected with Northern Ireland football my best wishes for a successful Euro 2016 qualifying campaign."
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