Sheffield United extended their unbeaten run to eight games, thanks to ex-Watford striker Darius Henderson.
After a frustrating opening period for the visitors, Henderson headed into the path of Danny Webber who swivelled and fired into the net.
Jack Cork could have levelled but headed Lee Williamson's corner over.
They were made to pay for the miss when Greg Halford nodded on to Henderson who hooked his shot across keeper Scott Loach and into the left-hand corner.
Watford manager Brendan Rodgers:
"We look vulnerable defensively.
"We can't keep showing good potential and then the minute we concede look fragile and let our tactical discipline go - it's something I need to look at.
"That was certainly the case when we went behind and when the second goal went in - my main concern is our defensive cover and shape."
Sheffield United manager Kevin Blackwell (on goal scorers Darius Henderson and Danny Webber): "I knew Darius was a Watford favourite and always kept my eyes focused on him.
"When I bought him I didn't think I could keep James Beattie in the summer and I didn't want to get caught without a main target man if Beattie moved on.
"He is a great striker in this division and we all know what Webber can do."
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