Pearson will become the third manager sacked by the club this season following the exits of Javi Gracia and Quique Sanchez Flores.
The ex-Leicester boss was appointed in December until the end of the season.
He won seven matches in the Premier League – including beating runaway champions Liverpool.
But the Hornets were soundly beaten at West Ham on Friday and with their two remaining matches against Manchester City and Arsenal, club officials fear the consequences if Watford lose both of those fixtures.
Whoever replaces Pearson on a permanent basis will be the Hornets’ 13th such appointment since Sean Dyche took charge nine years ago.