The 24-year-old was sentenced to 10 months imprisonment for affray back in June, but was released earlier this week.
Deeney issued an apology to the club during his time in prison and the Hornets have now confirmed he is free to rejoin them.
A club statement read: "The Hornets welcomed the striker's recent independent apology - however it was genuine remorse shown in a face-to-face environment, coupled with a serious commitment to rehabilitation on all levels, which was just as key to his retention.
"This decision has been taken after extensive discussions between senior club officials, Deeney himself and his representatives.
"The club believes it can play a key role in facilitating Deeney's rehabilitation into a professional working environment, and will be closely monitoring all aspects of the forward's activities connected with Watford FC."
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