The midfielder played five times after joining in March as Birmingham secured a top-half finish, and did enough to persuade Rowett to consider a permanent deal, despite suffering from a broken nose during his time with the Blues.
Speaking to the club’s official website, Rowett said: “Diego is a player we would love to bring to the club.
“The talks are still ongoing but that’s out of our hands – all we can do is try to put something together that is attractive to Watford.
“The same has been said about Robert Tesche.
“And if they don’t work out we have got to move on, there are plenty of players available and plenty of players on our list.
“But those are the types of players we are trying to bring in and if you saw our performances last season towards the end of the season that’s the difference those players can make.
“That’s all we are looking to do, the aim is to always hunt for those top calibre players and until I get them, quite simply, nothing will happen.”