The 26-year-old, who has been the subject of bids from Burnley and Leicester as well as interest from QPR and Swansea, is in talks over a bumper four-year deal.
Deeney, whose current contract expires in 2016, has scored two goals already this season to help the Hornets climb to second in the Sky Bet Championship.
He moved to Vicarage Road from Walsall in 2010 and has an impressive record of 68 goals in 181 appearances.
Deeney was rested for Tuesday night's Capital One Cup defeat at home to Doncaster but will be back in the team for Saturday's league visit of Huddersfield, by which time Watford hope he will have put pen to paper on the new terms.
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