The 32-year-old exits Vicarage Road after four-and-a-half years, having made just two Premier League appearances for the Hornets in the last two seasons.
"It was always a dream to play in the Premier League and Watford gave me this opportunity," Prodl said in a statement on the Watford website. "I will always reflect very positively on my time here. When I signed four and a half years ago, my gut told me it was going to be a very good move and everything has proved this to be right.
"I am just grateful to have Watford on my CV, I am moving on now but I am glad I have been here. I will always come back and watch the guys play at Vicarage Road and Watford will always have a place in my heart."
Reports in recent days have suggested that Prodl could sign for Watford's Serie A sister club Udinese.