The winger only arrived at the Amex Stadium in January.
Knockaert has impressed since returning to England from Standard Liege in January, registering two goals and as many assists in 13 Championship matches.
Brighton are currently third in the standings, but the tabloid claims that Knockaert will seek a move if the Seagulls don't achieve promotion.
A £5 million fee would see Chris Hughton's side double their money on the Frenchman, who left Leicester City for nothing last summer.
Knockaert was part of the Foxes side that won the Championship two seasons ago, but he made just 11 appearances for Nigel Pearson's team last term.
Watford, who look certain to remain in the Premier League, have also been linked with FC Groningen attacking midfielder Albert Rusnak - once on the books of Manchester City.
The Hornets paid a reported £3.5 million for Dutch winger Steven Berghuis last summer, but the Sun reported last week that the 24-year-old was ready to quit the club, having made just seven first-team appearances this season.