The 31-year-old, missing from the squad since December 23 for personal reasons, on Tuesday assisted on the first two goals as City bounced back after being held 0-0 by Crystal Palace on Sunday, reports Efe.
BT Sport football commentator Ian Darke said he spoke to de Bruyne after the Palace game and the Belgian said that he was "OK" but wondered why Jason Puncheon was not given a red card.
Watford meanwhile have slipped down to ninth spot after losing four of their last five games. There were two changes for Watford from their late reverse against Swansea with Andre Gray and Etienne Capoue replacing Stefano Okaka and Tom Cleverley.
City continued to press and forced a second on 13 minutes when Christian Kabasele put De Bruyne's cross through his own net.
The same was true of the returning David Silva, who had been absent due to complications involving the health of his pregnant wife. The counter-attack was Watford's only likely route to goal and that almost proved fruitful in the 29th minute when Andre Gray broke clear and burst goalwards but his low shot was well saved by Ederson. He bossed this game from start to finish in typically classy fashion.
And City have received a pre-match boost with De Bruyne named to play and he's joined by the returning David Silva and John Stones in their starting eleven. His right boot is a thing of beauty.
After 20 games, City have scored 61 goals, the most in the Premier League and allowed the fewest.
Pep Guardiola: "It was excellent, brilliant". It was a good reaction after dropping points at Selhurst Park. He has improved and a lot of it is down to Pep Guardiola but a lot of credit is also down to him [Sterling], taking his knowledge on and then he implements it and we are seeing the outcome of it.. Physically he is doing well and he is a very important player for us. - It doesn't make much sense, to be honest. We weren't aggressive in our defence, it was too easy for them. "We don't know for how long but he made another exhibition".
"It should have been more, in all honesty".
Hodgson claimed before the game there was "no magic formula" to competing with City, insisting his Palace side's hopes of getting something from the game hinged on working hard and defending well while maintaining an attacking threat. "Everything's fine [between Pep and I]".