The Hornets are understood to have offered £8million up front for Marković – who played under new head coach Marco Silva at Hull City – with a further £2million in add-ons.
The 23-year-old winger joined the Tigers on loan in January after spending the first half of the season with Sporting Lisbon.
He scored twice in 12 outings – including the opener in a win over Watford in April – but couldn't help Hull avoid slipping into the Championship.
Marković cost Liverpool £20million when he moved to Anfield from Benfica in 2014. But he failed to secure regular games with the Reds and left to join Fenerbahçe on loan after a single season.
He spent the first half of the previous campaign back in Portugal but made just six Liga NOS appearances for Sporting, scoring once. However, his form was much improved after following Silva to Hull.
Who is Marković?
An outlay of nearly £120million saw eight arrivals with Marković the second most expensive.
But the winger failed to live up to his promise. In his only season at Anfield, Marković made 34 appearances in all competitions but only 11 starts as the Merseysiders struggled to replicate their form of the previous year.
“I had no problem with Brendan Rodgers and we had a bond until, for some reason that remains a mystery to me, he changed,” Markovic said after joining Fenerbahçe on loan for the 2015/16 campaign.
“He stopped playing me and then at the start of the season he didn't even include me in the squad. Nobody explained to me what was going on or what his plans were, so I decided to leave.”
He spent the 2015/16 season on loan in Turkey but made just ten Super Lig starts for the Istanbul outfit as injury interrupted his season. Marković was then sent to Sporting Lisbon at the start of 2016/17 campaign having failed to force his way into Jürgen Klopp's plans.
However, he struggled for game time at Sporting and the loan agreement was cut short in January.
Silva knew exactly what he was getting when he took Marković on loan at Hull City. The winger had scored for Benfica against Silva's Sporting team in a 1-1 draw in August 2013.
And his faith was repaid as Marković showed something like the form he had for the Àguias before moving to England.
What would Marković bring to Watford?
One thing the Hornets lacked last season was pace. Nigerian forward Isaac Success was one of the few members of Walter Mazzarri's squad who had the speed and dribbling ability to take players on. But the Italian coach did not trust Success to start and that made Watford predictable.
Marković would change that in an instant. He is quick off the mark, can run at pace and is happy taking men on. Those traits are incapsulated perfectly in the images below, taken from Hull's clash at Manchester City.
Marković does well to intercept a loose pass into the centre circle and, without a second thought, is off. He runs at City's two centre-backs who are exposed and uncomfortable facing their own goal.
The Serbian progresses and gets all the way into the box before he is finally put under pressure and his shot is blocked. But with better decision making, he would surely have created a good shooting opportunity out of nothing.
Another example, in Hull's draw at Southampton, sees Marković's anticipation allow him to nip in and win the ball.
One area of Markovic's game which needs improvement is his final product. He did not supply any assists in his five months at Hull City and managed just one in 19 Premier League appearances for Liverpool.
He was not helped by the Merseysiders' sharp decline in form, nor was it beneficial to his natural game that he was moulded into a wing-back by Rodgers when it became apparent the Reds were struggling to replicate their form of the previous season.
How would Marković fit in at Watford?
Last season the Hornets tended to play without traditional wide players. Nordin Amrabat, a winger before moving to England in January 2016, was converted to a wing-back while Success was scarcely entrusted to play by Mazzarri.
If the Hornets land Marković that will change. The Yugoslavian-born attacker is a conventional wideman and further reports that Silva could raid his former club for Kamil Grosicki – another winger – only add weight to the notion Watford will change system.
A switch to 4-2-3-1 could be one option, though Silva tended to favour 4-1-4-1 or 4-4-1-1 with Hull depending on who their opponents were. Marković would comfortably slot into another of those systems.