Munoz had been in charge of the club for less than 10 months before being relieved of his duties.
Watford are 14th in the Premier League, just seven games into the season, and lost to Leeds on Saturday.
A club statement read: "Watford FC confirms Xisco Muñoz has left his post as the club's Head Coach.
"The Board feels recent performances strongly indicate a negative trend at a time when team cohesion should be visibly improving.
"The Hornets will always be grateful to Xisco for the part he played in securing last season's promotion and wish him well for his future career in football.
"No further club comment will be available until the imminent announcement of a new Head Coach."
Munoz helped them get promoted back to the Premier League last season, but was given just seven games in the top flight.
He took seven points from those games, but with the international break coming up, the Hornets decided to make a change.
The Spaniard was their 14th permanent manger over the last 10 years and now they are looking for number `15.
Munoz was the first Premier League manager of the season to be sacked with plenty of others on the hot seat.
Steve Bruce is under pressure at Newcastle following a slow start to the season, as is Daniel Farke at Norwich.
Nuno Espirito Santo's future is in doubt after a dreadful run of results for Tottenham, while Ole Gunnar Solskjaer's position at Manchester United is by no means secure.