The 36-year-old, who played with Rovers boss Paul Dickov at Blackburn, has only been with the Hornets since the back end of February, having signed a short-term deal until the end of the season.
Neill has only six minutes of first-team football under his belt, and Watford boss Beppe Sannino has other defensive options back at his disposal.
Capped 96 times by Australia, Neill now heads to South Yorkshire until April 22 to help Rovers in their fight for Sky Bet Championship survival.
Dickov told Rovers' official website: "Lucas is a fantastic signing for Doncaster Rovers. He is a top professional and has captained Australia in the World Cup.
"I played with him at Blackburn and I know him very well. He brings a wealth of experience and knowledge of the game. He is a great person both on and off the field.
"Lucas is as fit now as I have ever seen him, which is credit to him and his attitude.
"There were a lot of other Championship clubs interested in signing him, but he wanted to come to Doncaster, I'd like to thank everyone across the board getting the deal over the line."