The winger was scheduled to remain with the Championship club until the end of the season but has returned to his parent club with immediate effect.
"We are very grateful to Harry Redknapp and the Tottenham staff for their help in arranging his loan," Watford boss Malky Mackay told the club's official website.
"It is a shame it has not worked out for either of us and we wish him well for the future."
Townsend made two starts and one substitute appearance during his stay at Vicarage Road.
Source: PA
Source: PA