The Hornets made the ill-advised decision to replace the former Spain defender with Walter Mazzarri despite Sanchez Flores keeping the Vicarage Road club in the Premier League at the first time of asking and reaching the FA Cup semi-finals.
It then became apparent that Ireland's management team was only the second choice on The Potters' wish list.
They had hoped to announce the hire on Friday but negotiations dragged on, meaning he is likely to watch Monday night's game with Manchester United from the stands rather than the touchline.
"I belong to Espanyol, I have contract and am honest with the club".
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"I'm well and quite happy with my situation", the 52-year-old Spaniard added.
Flores had been expected to tell the La Liga club that he was bound for the Premier League strugglers. He said, "I'm here and at no point have I said the opposite. The facts are that the players don't want to leave and the coach also continues". O'Neill was in England earlier this week and is said to have had preliminary talks about taking up the role.
Former Ireland manager Mick McCarthy is the favourite to take over as the next boss should O'Neill depart for Stoke.
Although the Derryman has a verbal agreement with the FAI to extend his contract, nothing has been signed and O'Neill is thought to, technically, be a free agent right now.