The 23-year-old returns to the Premier League just seven months after Barca triggered their buy-back clause to sign him from Everton. He previously played for the Toffees on loan during the 2013-14 season before making a permanent move to Goodison Park in 2015.
Deulofeu has struggled for minutes at Barca this season despite the summer sale of Neymar to Paris Saint-Germain, starting 10 of 17 appearances in all competitions. He has played just nine minutes since the end of November, and the recent addition of Philippe Coutinho from Liverpool figured to further limit his minutes.
The Spain international's loan runs through June 30, Barca announced on Monday, with Watford covering his salary and a potential add-on of €1 million.
He joins a Watford side that recently hired Javi Gracia to replace Marco Silva as manager. The Hornets sit 10th in the Premier League but are just four points clear of the relegation zone.