The 22-year-old scored 14 times last season but handed in a transfer request after several Championship clubs showed an interest in him.
Deeney, who was released by Aston Villa as a youngster, signed for Walsall in March 2006.
"Watford's interest in Troy has been no secret," Walsall boss Chris Hutchings told the club website.
"They made a number of bids for him. Troy made his position quite clear but we were not prepared to let him leave unless the deal was the right one for the club."
Source: BBC Sport
Source: BBC Sport