The 32-year-old former West Ham player, who has two years left on his contract with Guangzhou, spent the second half of last season on loan to Italian Serie A side Fiorentina.
The Italy international now seems set to be the 12th player recruited by new Watford head coach Quique Flores as he prepares the Hornets for their first season back in the Premier League since 2006.
Sky sources understand personal terms have already been agreed and a completion of the transfer is imminent.
New Hornets boss Quique Flores has been busy adding to his squad ahead of their first season back in the Premier League since 2006, and 10 new recruits have already arrived at Vicarage Road.
Diamanti scored eight times during his one season at West Ham, helping keep them in the Premier League at the end of that 2009/10 campaign.
He also scored the winning penalty for Italy in their quarter-final shoot-out victory over England at Euro 2012.
Meanwhile, Sky sources understand Watford are also poised to sign goalkeeper Rafael Romo from Udinese on a short-term deal.
The Venezuela international, 25, will provide cover for current No 1 Heurelho Gomes.