The Spanish coach leaves the fourteenth-placed team in the league standings, having gained seven points in the first seven matches.
Watford lost their last match against Leeds with a goal to the last for nothing.
Watford said: “The board feels that the recent performance is strongly indicative of a negative trend at a time when the team’s cohesion should clearly improve.”
Munoz took charge at Vicarage Road last December and led the team back to the Premier League, where they finished second in the final season of the tournament.
Watford said the appointment of a new manager was “imminent”.