The 23-year-old Spanish global has featured five times since returning to the Camp Nou last summer and his playing time is unlikely to improve following the arrival of both Ousmane Dembele and Philippe Coutinho.
The 23-year-old has been restricted to just five starts in La Liga this season, and has now been sent on loan to Watford for the rest of the season.
Deulofeu becomes the first signing of new Hornets boss Javi Gracia, who took charge of the club on an 18-month contract on January 21, replacing Marco Silva following a downturn in results which the club blamed on interest from Everton in hiring Silva away.
The Spanish winger spent the first half of last season on loan at Everton, before moving to AC Milan and impressing.
Following on from his exploits with Milan, Deulofeu was one of the star men for the Spain Under 21 side, which reached the European Championship final in the summer.
Deulofeu has struggled for minutes at Barca this season despite the summer sale of Neymar to Paris Saint-Germain, starting 10 of 17 appearances in all competitions.
Barcelona signed Liverpool playmaker Philippe Coutinho earlier this month, leaving Deulofeu with even fewer playing opportunities.