Ferguson's men jumped out of the bottom three with a terrific triumph at London Road which dashed the visitors' hopes of automatic promotion.
Recalled midfielder Danny Swanson fired Posh ahead just before the half-hour and dangerous strike duo Dwight Gayle and Lee Tomlin killed off the Hornets during a devastating second-half spell.
They had to survive a late scare against 10 men, though, as deflected goals from Mark Yeates and Fernando Forestieri gave Watford a sniff of an unlikely fightback, but ultimately they were not enough to prevent Posh stretching their unbeaten run to nine matches.
Ferguson said: "For 70 minutes we were absolutely outstanding but we were all over the place for the last 20 and that is not good enough at this level.
"Staying in this division could come down to goal difference at the end of the season and those two Watford goals could be costly for us.
"We stopped doing the things that had put us in control but I still have to give the lads credit for another great result. I felt before this game that three wins would keep us up and we've got the first of them.
"With four matches to go our destiny is in our hands. We've been on a great run but have to keep that pedal pressed to the floor and continue upping the ante."
Watford boss Gianfranco Zola said: "It was a bad day for us and getting automatic promotion will now be very tough, but we will keep on fighting as you never know what can happen in football.
"We battled on until the end and could even have got a draw if the game had lasted a little bit longer. We paid the price for making some stupid mistakes and also for a couple of decisions that the referee could have made in our favour."