David Norris grabbed his fifth goal of the season but it wasn't enough to stop Town's miserable run against Watford continuing.
Two goals in two minutes just before the break from Stephen McGinn and Marvin Sordell put the Hornets in command but Norris' header from the edge of the box midway through the second-half gave Blues a lifeline and substitutes Connor Wickham and Ronan Murray both went close to grabbing an equaliser.
Town made six changes to the side that went down at home to Coventry at the weekend with Brian Murphy and Damien Delaney coming in for their first League games of the season.
David Norris returned to the midfield with Jack Colback coming in for his first appearance since returning to the Club on loan from Sunderland.
Tamas Priskin started against his former club and was immediately in the action, creating an opening for Jason Scotland with the striker firing over. Priskin then escaped his marker and raced on to a long ball but was forced wide when a shot looked on.
Danny Graham flashed a cross past Murphy, then Sordell just failed to get on the end of a right wing delivery. Murphy doing well to gather Graham's cross.
McGinn fired over while at the other end, Priskin almost got on the end of Martin Taylor's backpass, Scott Loach forced outside his area to clear.
Graham volleyed over, then sent a flashing header just wide but it needed a great clearance from John Eustace from inside his six yard box from Troy Brown's dangerous cross to prevent Town going ahead.
An even first-half had a sting in the tail for Town though with the Hornets striking twice in the space of two minutes. Lloyd Doyley's long throw was flicked on by Martin Taylor and McGinn volleyed in.
Watford struck again before the half-time whistle, Sordell, the Football League Young Player of the Month for September, beat Gareth McAuley to the cross and thumped a header into the far corner.
Watford pressed for a match-clinching third goal as the second-half got underway and broke behind the Town defence at will in the opening 10 minutes, Murphy clawing away two crosses in quick succession.
Town made a double change just before the hour with Wickham and Murray on for Priskin and Jake Livermore.
Norris picked up his sixth yellow card of the season for a foul, Scotland forcing Loach into his first save of the match - a comfortable one from the Trinidad international's 25 yard strike.
Carlos Edwards became Town's third change, on for Brown and seconds later Blues were back in the game, Norris heading into the unguarded net from the edge of the box after Loach had failed to clear his lines.
Troy Deeney replaced Sordell in Watford's first change but Town were clearly lifted by the goal and Murray blazed a shot just wide.
Watford made a second change for the closing stages, Will Buckley on for Michael Bryan.
Wickham buzzed a shot over the Hornets' goal after Murray had tried to set him up before Blues did have the ball in the net from Murray but not before the linesman's flag was raised.
Murray couldn't control Wickham's cross in front of goal, Leadbitter threaded a ball through to Scotland inside the box but Loach ended the danger.
Town pressed for an equaliser but the Hornets held on and stretched their unbeaten record to 11 League games against Blues.
Watford : Loach, Doyley, Mariappa, M.Taylor, A.Taylor, Mutch, Bryan (Buckley 80), Eustace, McGinn, Sordell (Deeney 70), Graham. Subs not used: Gillmartin , Hodson, Walker, Bennett, Whichelow.
Town: Murphy, Brown (Edwards 68), McAuley, Delaney, Smith, Norris, Livermore (Murray 58) , Leadbitter, Colback, Priskin (Wickham 58), Scotland. Subs not used: Lee-Barrett, Peters, Townsend, Eastman. Booked: Norris.