The former West Ham player was a surprise addition to the first-team when he first arrived at Vicarage Road.
He joined the club from Chinese side Guangzhou Evergrande in August but has failed to establish himself with the club.
Diamanti has played just three times for The Hornets this season and is being linked with a move to his former club Livorno today.
Tutto Mercato Web is reporting that Diamanti and his representatives held talks with the Watford hierarchy this week regarding his future at the club.
The talks were said to be amicable and the former Italian international is believed to be happy to stay with the Premier League club if no deal can be found.
However, his overwhelming wish is to join his former club.
Diamanti is still a club hero at Livorno after a memorable two year stint with the club. Livorno are currently facing a relegation battle in Italy's Serie B second-tier and will hope that Diamanti would be the catalyst for a resurgence in form.