The Championship side are winless in nine league games, leaving them 13th in the table, and the Italian feels the club need a fresh approach to improve their fortunes
The Championship outfit have failed to register a victory in their last nine league fixtures, including five straight home losses.
The Italian led the side to the Championship play-off final in his first season in charge, losing 1-0 to Crystal Palace in the final - but Zola believes recent form means it is right to call time on his tenure.
"It is with great sadness that the board of Watford has accepted the resignation of head coach Gianfranco Zola," the club said in a statement on their official website.
"Watford FC wishes to place on record its sincere gratitude to Gianfranco for his achievements at Vicarage Road, and for always acting with the utmost dignity and grace.
"The Board fully respects his decision and Gianfranco will be welcome at Watford Football Club at any time in the future.
"There will be no further comment from Watford FC or any individual at this time."
Zola added: "This decision has not been made quickly. I mentioned after the game on Saturday that I wanted to think about things overnight and that is exactly what I have done.
"I must place Watford first in my thoughts and it is for this reason that I have taken my action.
"I feel that it is in the best interests of the team that somebody new is given the chance to bring the success which we have all hoped for and worked very hard for."