Forsyth's intial month-long loan spell was due to expire after the Easter Monday clash at Leeds United but a deal has been agreed for the 24-year-old to stay with Nigel Clough's side.
Watford have included a 24-hour recall clause in the agreement.
"It's great news Craig is staying with us; he's come in and made a real impact on the side," Clough told Derby's official website.
"He's someone who we've admired for a while and he's come into the side and really impressed us.
"We think he has all the right attributes to be a very good player especially with his height, composure on the ball and he has a lovely left foot as well.
"We're delighted he's staying on for the next few weeks and hopefully he can maintain his form."
Forsyth, who spent time at Bradford earlier this term, joined Watford from Dundee in June 2011 but has found first-team action hard to come by under Gianfranco Zola, making just three appearances.
He has featured four times so far for Derby and has been deployed at full-back and on the left side of midfield.