Gianfranco Zola's team had to win to put second-placed Hull under pressure ahead of their trip to relegation-threatened Yorkshire rivals Barnsley on Saturday - and they did.
Quickfire goals from Troy Deeney and Nathaniel Chalobah towards the end of the first half saw the Hornets move to within a point of the Tigers.
Substitute Harry Kane pulled a goal back in the 61st minute for Leicester, who remain seventh and will see their promotion hopes extinguished if both Bolton and Crystal Palace win on Saturday.
Almen Abdi found space down the left of the area again five minutes before half-time. This time he forced Kasper Schmeichel into a good save at his near post and from the resulting corner Joel Ekstrand headed the ball back into the danger area at the far post and Deeney reacted quickest to score from six yards out.
Chalobah's bolt from the blue saw Watford quickly double their lead in the 43rd minute. Loose control from Adbi saw the ball roll into the path of the Chelsea man, who silenced the King Power Stadium with a rocket of a right-footed shot from 25 yards that hit the back of the net via the underside of the crossbar, leaving Schmeichel motionless.
Kane halved the Foxes' deficit shortly after his 58th-minute arrival.
Paul Konchesky, attacking from left-back, cut back on to his right foot and his shot was deflected goalwards where Kane was on hand to head home after timing his movement to perfection to stay onside.
As the game became stretched both teams looked dangerous on the counter attack, but just lacked that final decisive pass.
Watford substitute Cristian Battocchio forced Schmeichel into a parrying save with the last action of the game deep into injury time.