Sources have confirmed the Hornets would very much like to bring the defender back to Vicarage Road this summer and hope the way they have developed both Mfuni and Max Alleyne will help their cause.
Mfuni made a huge impression after signing on loan in January, starting eight consecutive matches in Watford's back-line.
His campaign was brought to a premature end when he suffered the season-ending blow at Stoke City earlier this month, an injury that will now be operated on.
Stephen Mfuni battles for the ballStephen Mfuni battles for the ball (Image: Alex Cozzi/Watford FC)
The Hornets have developed a strong relationship with City, though, and are keen to use it to try and loan Mfuni back for 2026/27.
The association between the two clubs can be traced back to 2003, when sporting director Gian Luca Nani signed Pep Guardiola for Brescia.
City were impressed with the way Watford developed Alleyne, who played 17 matches under Paulo Pezzolano and Javi Gracia, both of whom Guardiola thanked for helping him "grow up as a player".
Max Alleyne on loan at WatfordMax Alleyne on loan at Watford (Image: Alan Cozzi/Watford FC)
Mfuni was then sent to WD18 amid lots of Championship competition and immediately caught the eye, City understood to be delighted with his development in Hertfordshire.
Head coach Ed Still revealed after Mfuni had suffered his injury that the defender's "limitless" potential "exceeded what what I'd been told and seen".
He said: "It's a real shame that injury has curtailed Stephen's season and his time with us as it's been a delight to work with him; there is something really rewarding and special about seeing a young player develop before your very eyes.
"I knew of his potential as I've worked closely with the City Group before with two loan defenders.
"Stephen's skillset, physical attributes and attitude exceeded what I'd been told and seen.
"His potential is limitless and I know, if his career pans out as it should, he is extremely grateful to the whole club for how it looked after him."
Stephen Mfuni poses in his Watford kitStephen Mfuni poses in his Watford kit (Image: Watford FC)
It could take some time for the 18-year-old's next steps to be decided.
A number of City's first-team defenders will be at the World Cup and Guardiola may need those remaining at home to fulfil pre-season matches and potentially play in the Community Shield on August 16, a week after the Championship season begins.
Premier League side Bournemouth are understood to have been monitoring the progress of the England youth international, who will also spend the coming weeks recovering from surgery.
Watford, though, hope Mfuni's positive experience at Vicarage Road, combined with their bond with City, gives them a chance of securing his signature for a second time.