Leicester went into the game with the additional motivation of avenging last season's dramatic 3-2 aggregate reverse in the play-offs and they took the lead in bizarre fashion in the 10th minute.
There should not have been any danger when the ball was passed back to Manuel Almunia but the Hornets goalkeeper only succeeded in hitting his attempt clearance at Wood, who was closing him down, and the ball rebounded straight into the net.
The Foxes had the ball in the net a second time soon after but a flag had already been raised against Dyer for offside.
With Watford struggling to make attacking inroads, the linesman's flag again came to their rescue in the 26th minute when an unmarked Wood nodded a deflected Knockaert cross into the net - but the striker was also deemed to be offside.
Kasper Schmeichel had to make a smart double save to thwart Lewis McGugan but those stops apart, the Leicester goalkeeper was largely untroubled in the first half and his side twice nearly doubled their advantage before the break.
First an unmarked Marcin Wasilewski put a clear header from a Knockaert corner over the top and then Almunia was pressed into emergency action to prevent Gabriele Angella inadvertently turning a David Nugent cross into his own net.
But Leicester did score a deserved second seven minutes after the restart when Knockaert went some way for atoning for his penalty miss in the second leg of last season's play-off semi-final.
Dyer made the goal with a searing run down the left which saw him outpace Lloyd Doyley before pulling the ball back to Knockaert, who took a touch before firing left footed past Almunia.
The Hornets could have few complaints at the scoreline at that stage but they should have pulled a goal back when an Ikechi Anya pass left Fernando Forestieri with only Schmeichel to beat - but the forward fired straight at the goalkeeper.
Anya also shot wide when well placed in the penalty area before the Scottish international took Schmeichel out of the game when he cut the ball back but a stretching Troy Deeney prodded the ball wide of the largely unguarded goal.
And the Hornets were punished for their inability to convert their chances with four minutes remaining when a fine reverse pass from substitute Gary Taylor-Fletcher put Dyer through on goal and despite the best efforts of Almunia, the ball looped up off the keeper and into the net.
- Sports & Recreation
- Manuel Almunia
- Anthony Knockaert
- Lloyd Dyer
- Kasper Schmeichel