Sources suggest club chiefs are 'actively searching for a replacement' for the 70-year-old following the Hornets' crushing 3-0 defeat to Premier League relegation rivals Norwich City.
Ranieri was furious with his players following Friday night's result - an eighth defeat in Watford's last nine league and cup games - saying players who "don't want to understand my philosophy can go home".
It is believed the dressing room has turned toxic and the defeat to Norwich, and the manner of it, was the final straw for Ranieri's superiors.
Watford had struck late on to seal a 1-1 draw with Newcastle United in their previous league outing, with Joao Pedro's 87th minute goal at St James' Park sealing the only positive result they've managed from their last nine matches.
The Hornets have only picked up two victories since Ranieri took charge when he replaced Xisco Munoz in October - one against Everton at Goodison Park and one at home to Manchester United in a terrible display from the Red Devils, which proved to be Ole Gunnar Solskjaer's final game in charge.
There has been no official confirmation from the Hornets that Ranieri has been relieved of his duties, and he may well limp on until a successor is found.
But talkSPORT reporter Alex Crook brought us the latest news on the Italian's future at Vicarage Road, saying it's hanging by a thread.
"It does look like Claudio Ranieri's time as Watford manager is hanging by a thread," Crook said on talkSPORT on Saturday afternoon.
"I'm hearing from people I'm speaking to this morning that the atmosphere in the dressing room is toxic. Ranieri branded his players 'selfish' after the defeat last night and clearly all is not well between the manager and his players.
"Over the last ten years the average lifespan for a Watford manager is just 29 league games, Ranieri has had 14 in charge now, with a paultry 7 points, and that uplift they were looking for just hasn't materialised.
"It's history repeating itself for Ranieri as well as Watford. He came into Fulham as a bit of a firefighter to try and keep them in the Premier League,but didn't see out the season.
"For Watford when they were last relegated into the Championship they did so with three managers in a single season.
"The thing that has kept Ranieri handing on is that he does have a longstanding relationship with the Pozzo family, but it looks like their patience will snap.
"Watford have a two-week break now until they play against Burnley on February 5,, a huge game with Burnley bottom of the table and Watford in 18th, and it would be a surprise if they didn't have a new man in place before then.
"Some eagle eye observers have spotted Fabio Cannavaro in the stands at Vicarage Road, we know that he is keen on a return to management and a move to the Premier League.
"He's been linked with Everton, too, so watch this space on that one."