Richard Chaplow gave Town the points with virtually the last kick of the game in a dramatic finish at Vicarage Road.
The midfielder kept his nerve when Freddie Sears sent him clear and slid the ball past Huerelho Gomes to take Blues back into the Play-Off places with the only goal of the game.
Blues restricted the free-scoring and in form Watford to just a couple of chances and Sears and Luke Varney had tested Gomes before Chaplow came up with that dramatic winner and right in front of the Blue Army.
Town made three changes to the side that beat Bolton in midweek, Sears dropping to the bench with Chris Wood and Varney coming into a three man attack. Kevin Bru stepped into a midfield berth with Teddy Bishop and Jonny Parr out injured.
Gomes was quick off his line as Varney looked to get in inside the first minute, while Blues were relieved at the other end to see Odion Ighalo fail to control a cross from Miguel Layun inside the box.
Bru was in the right place to clear as Daniel Tozer threatened down the Watford left, Varney then had the ball in the net from Daryl Murphy’s pass but the offside flag was raised.
Adlene Guedioura fired over from 25 yards after a great touch took him into space, Ighalo seeing his shot blocked by Christophe Berra then Murphy at the other end sent a left footer goalwards that hit Joel Ekstrand and drifted to safety.
Troy Deeney headed wide at the back post, Tommy Smith was in the right place to clear after Ben Watson was heavily involved in a flowing Watford move but as the clock ticked to 30 minutes, Bart Bialkowski had not been tested.
Watford were forced into a change with Ekstrand stretchered off, Gabriele Angella the replacement - the substitute immediately booked for a foul on Wood.
Deeney sent his effort high into the travelling Blue Army, Gomes forced into the first save of note to push Varney’s strike wide.
A brilliant challenge from Luke Chambers inside the Town box denied Guedioura as he burst clear, Bru firing well wide at the other end as a first half of very few chances came to an end.
Gomes had to punch clear as Murphy threatened as the second-half got underway, Tyrone Mings picking up 10th booking of the season soon after that will see him suspended for the Bournemouth game.
Paul Anderson replaced Varney in Town’s first change just before the hour, Watford substitute Ikechi Anya looking to get in for the home side from Deeney’s flick on but Smith shielded the ball away from danger.
Guedioura couldn’t control his shot from a good position as the home side pressed for an opener but Town held firm and Mings almost found a way to goal as the game hung in the balance.
Gomes was at full stretch to divert Sears’ effort behind for a corner and from the flagkick, Chambers headed over as Blues continued to look as likely as the Hornets to take the points.
Ighalo was inches away from converting Deeney’s cross as the game entered the last 10 minutes, then Angella presented Murphy with the ball 30 yards out but the Championship’s top scorer was crowded out.
Jay Tabb sent a 20 yarder over the bar and while Watford pushed forward looking for that opener, Blues held firm as they had done all game to take what looked to be a deserved point until Chaplow had that final word to make it three.
Watford: Gomes, Motta, Cathcart, Ekstrand (Angella 35), Hoban, Tozer (Anya 55), Watson, Layun (Vydra 78), Guedioura, Ighalo, Deeney. Subs not used: Bond, Munari, Paredes, Pudil, Vydra. Booked: Angella.
Town: Bialkowski, Chambers, Smith, Berra, Mings, Skuse, Tabb, Bru (Chaplow 86), Wood (Sears 72), Varney (Anderson 56), Murphy. Subs not used: Crowe, Clarke, Benyu, S.Hunt. Booked: Murphy, Mings, Tabb.