The Hornets have won all four Premier League games they have played so far and Gracia has been awarded the prize ahead of Jurgen Klopp, Mauricio Pochettino and Maurizio Sarri.
Having beaten Brighton, Burnley and Crystal Palace to take maximum points from their first three fixtures, Watford then pulled off a comeback victory over Tottenham last weekend to finish August with a 100% winning record.
Liverpool and Chelsea are the only two other clubs to boast the same impressive record four games in and goal difference is all that is keeping Gracia's Watford off the top of the table.
The 48-year-old is the first Watford boss to win a Manager of the Month award since fellow Spaniard Quique Sanchez Flores received it for December 2015.
"I am very pleased. We are enjoying [it]. You never know what will happen," Gracia told the Premier League's official website.
"Don't look only at the end of the road. Try to enjoy day by day. Try to enjoy the very good atmosphere, the workers who are helping us, the supporters in all the games are a
"I think altogether we can achieve very good things."
With domestic football currently paused for the international break, Watford's next fixture will them face Manchester United at Vicarage Road on Saturday 15 September.