Jack Colback netted his fifth goal of the season but Town went down to a Will Hoskins winner 13 minutes from time.
Henri Lansbury put Watford ahead on 10 minutes when his free-kick from 30 yards out on the right of Blues' defence beat everyone and went in the far corner.
Colback levelled just past the hour with a close range finish but Hoskins won the game when he swivelled and struck from the edge of the box.
Town boss Roy Keane made three changes to the side that beat Scunthorpe at the weekend with Connor Wickham rewarded for his winning goal with a starting place. Grant Leadbitter returned after a two match ban with Liam Rosenior restored to the right-back berth.
Lansbury warned Town of what was to come with a free-kick inside the first minute that took a deflection before hitting the Town bar.
The Arsenal loanee didn't have to wait long to find the net though, Rosenior penalised for a foul out wide and Lansbury curled a free-kick into the danger area, the ball beating everyone before nestling in the far corner.
Leadbitter almost put Jon Walters in as Town looked to respond, the midfielder heading wide from Jack Colback's corner soon after.
Wickham showed good strength before putting the ball in the Watford box but Martin Taylor hacked clear, the teenager then forced wide after Colback fed him down the right.
Blues made a change midway through the half with Lee Martin making his first appearance in two months, Owen Garvan making way in what looked a tactical switch, Colback moving into the heart of midfield.
Town possibly shaded the possession in the first-half but the Hornets were the far more dangerous and Heidar Helguson headed against the bar from Lloyd Doyley's cross.
Brian Murphy was then forced into action to save with his feet from Hoskins. The Town 'keeper had a far more comfortable job dealing with Don Cowie's long range effort.
Scott Loach gathered Damien Delaney's header in a rare effort at goal from Town in a disappointing first 45 minutes, with Colback's cross evading his team-mates after good link up play with Martin.
The second-half was under a minute old when Martin had the chance to level the scores at the far post from Murphy's cross but he couldn't direct the ball goalwards.
John Eustace sparked a melee with a late tackle on Walters that incensed the skipper, the Hornets midfielder picking up the first yellow card of the game.
At the other end, Murphy held firm from Tom Cleverley's strike, Hoskins then failing to put the home side two up from Helguson's knock back when only six yards out.
Leadbitter sent a free-kick just wide but it took an excellent save from Murphy to keep out Cleverley's right footed curler.
Loach was then forced into action to keep out Daryl Murphy from a corner but seconds later Town were level, Colback pouncing from close range after Shane O'Connor's cross was headed back into the box.
Danny Graham replaced Helguson for the last 20 minutes. Hoskins then wasting an opening from Eustace's clever pass but the striker didn't fail to hit the target a minute later, burying a low strike past Murphy after O'Connor had failed to clear.
Pablo Counago and David Healy replaced Murphy and Wickham, Hoskins then making way for Ross Jenkins with the goalscorer suffering from cramp. Lansbury substituted by Jon Harley.
Town camped around the home goal for the four minutes of added on time and Counago forced a save from Loach but the Hornets held on for the victory, leaving Town still with work to do to get away from the drop zone.
Watford: Loach, Mariappa, DeMerit, Taylor, Doyley, Cowie, Eustace, Cleverley, Lansbury (Harley 86), Helguson (Graham 72), Hoskins (Jenkins 81). Subs not used: Lee, McGinn, Buckley, Hodson. Booked: Eustace.
Town: B.Murphy, Rosenior, McAuley, Delaney, O'Connor, Walters, Garvan (Martin 25), Leadbitter, Colback, Murphy (Counago 79), Wickham (Healy 79). Subs not used: Lee-Barrett, Norris, Edwards, Smith.
Att: 13,996



















