Garcia, who only replaced Giuseppe Sannino on September 2, has been forced to step down on health grounds after spending a week in hospital due to chest pains, it was confirmed on Monday.
Former Brighton boss Garcia revealed he had been involved in the selection of McKinlay as his successor, and Watford chief executive Scott Duxbury believes the Scot is the right man to take the club forward.
"In Billy McKinley, we have found someone with the qualities and significant experience to build further on the foundations already laid for a successful season ahead," Duxbury told the club's official website.
"We appreciate Oscar's candour in placing the best interests of Watford ahead of his own personal thoughts.
"Everyone feels it is important that there is continuity in the coaching structure. Ruben Martinez and Javier Pereira will therefore continue as Billy McKinlay's assistants."
Watford have started the new season well with five wins from their opening nine games, leaving them fourth in the Championship table on 17 points.
McKinlay's reign begins with a home fixture against Brentford on Tuesday.
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