The left-back has found himself surplus to requirements
Having left Tottenham as a free agent, Rose, 31, signed a two-year deal with the Hornets during the summer under then manager Xisco Munoz.
The former England defender, though, has now found himself surplus to requirements as Ranieri, who took charge at the start of October, looks to different options.
Watford signed left-back Hassane Kamara from French club Nice earlier this week and also have 20-year-old defender James Morris waiting in the wings.
Rose was part of the England squad which reached the semi-finals of the 2018 World Cup in Russia and Ranieri feels the “fantastic” professional will soon be getting regular game time somewhere else.
“I don’t think he is finished, but here I think we need another kind of player for us,” the Watford boss said.
“Danny has high quality, but I need another kind of player, so it is for this reason, not for his quality, which I think is one of the best that I have.
“It is a technical decision. We bought Kamara because he is player who attacks, and I prefer this type of player.
“I want a left-back who goes up and down for 90 minutes, just this.”
The Italian coach added: “Now I have decided to go with another kind of player.
“I have James Morris, a young player who is very good, and also I have Kamara, and I decide between the two for left-back.”
Ranieri revealed he had not spoken directly to Rose about the situation, but hopes it will eventually be resolved amicably.
“He is working (training) alone. The club and I will try to find for him the best solution,” the Watford boss said.
“Of course Danny is a fantastic and very professional man, I hope to find a right solution for him to enjoy what he wants to do.”
After Saturday’s FA Cup tie against his old club, Watford head into a key run of games against their direct relegation rivals Newcastle, Burnley and then Norwich.
Nigerian forward Emmanuel Dennis will not be risked at the King Power Stadium as he manages a knock to the ankle in a bid to keep him fresh for the challenges ahead.
“Our priority is the Premier League,” Ranieri said.
“Of course if we were in the middle of the table, then also we can think about the FA Cup, but in this moment the priority is to save my players.”