Sanchez was in charge of Watford for the 2015-16 campaign before leaving at the end of the season.
Fellow Spaniard Gracia, whose coaching team have also left, had been in charge since January 2018 – making him the first Hornets boss to last more than one full season since 2013.
The appointment of Flores was confirmed 30 minutes later.
Watford are bottom of the Premier League table with one point.
Gracia led the club to Wembley last season, where they lost 6-0 to Manchester City in the biggest FA Cup final win in over a century, as well as 11th place in the Premier League.