Rodgers had only been in the hot-seat at Vicarage Road for seven months, but notified the Hornets board of his desire to rejoin Reading at the beginning of the week.
Watford have now confirmed his move back to the Berkshire club - where he helped set-up a youth academy before moving on to Chelsea in 2004 - after reaching a compensation fee in excess of £500,000.
The Northern Irishman took the Watford reins in November and helped steer them clear of relegation and into a safe mid-table berth.
Swansea City have given the Premier League side Wigan Athletic permission to talk to their boss Roberto Martinez after agreeing a compensation deal with the Latics.
The Spaniard, 35, played for the Latics for six seasons and has quickly forged a fine reputation as a coach due to his work with the Swans, who he took charge of in February 2007.