A fine solo effort from Kyle Hurst and a converted penalty kick by Miguel Fernandez had put Blues in control inside the first half-hour.
But Watford were back on level-terms before the break producing a quickfire double of their own on the stroke of half-time.
The comeback was complete on the hour mark when Joe Hungbo whipped an effort into the far corner to turn the game on its head.
Despite dominating the ball for the remainder of the contest Blues failed to find an all-important third goal.
Steve Spooner included David Davis and Dan Crowley in his starting line-up with in-form Josh Andrews a lone striker in a 4-2-3-1 formation.
Having eased to victory at Swansea earlier in the week, Blues looked to pick up there they left off.
Coalan Boyd-Munce latched onto a loose pass inside the Watford half and forced Adam Parkes into the first save of the game with a fierce low drive from 25-yards.
By the time Miguel Fernandez sent a dipping volley wide of the mark Blues were firmly in control.
Even the combative Davis fancied an early foray up field, bursting between yellow shirts before snatching at his shot.
The craft of Crowley and presence of Andrews was causing the visitors problems but the breakthrough came courtesy of some fine individual work by Kyle Hurst.
The Blues winger displayed some lightening footwork out on the left touchline, darting between two Watford defenders and charging into the box.
With a trio of Blue shirts up in support, Hurst opted to go alone and found the top corner with the aid of a slight deflection which sent the ball looping beyond Parkes.
Andrews, buoyed by five goals in two games, could have doubled Blues lead after he was released by one of Crowley’s trademark chips forward.
The rangy forward galloped beyond the Watford backline and with Parkes racing towards him, he calmly hoisted the ball up into the air only to see it drop off the underside of the crossbar.
Fernandez was starting to find pockets of space and after wriggling free from two challenges inside the box his goal-bound effort struck the arm of a Hornets defender.
There was no doubt as to who was going to take the resulting spot kick. The Spaniard calmly stepping up to slot the ball low into the corner.
The penalty seemed to spark Watford into life and they were soon back in the game thanks to another deflected effort.
Perkins sprayed a diagonal pass out to Crichlow who cut inside and bent the ball past the outstretched Elias Rouse with the help of a slight nick off Joe Redmond.
The momentum had firmly shifted as half-time approached and Blues two-goal lead had evaporated before the break.
Joe Hungbo, surrounded by three Blue shirts, showed some nimble footwork on the edge of the Blues box before teeing up Blu Lo-Everton. The creative midfielder controlled the ball with his first touch and with his second, sent a rasping drive off the underside of the bar and into the back of the net.
Half Time: Blues 2-2 Watford
Blues had been out preparing for some minutes by the time Watford eventually emerged from the dressing rooms.
Andrews pounced on a loose touch by Jack Burchell, perhaps still enjoying his extended half-time break, inside the Watford box but could only find the side-netting on the angle.
Watford immediately hit back with a chance of their own. Patterson worked the ball wide to the unmarked Stevenson who cut across his high effort and forced Rouse into a near post save.
It was a sign of things to come as from the resulting corner Watford crafted their third of the afternoon.
Stevenson overhit his left-wing set play but Hungbo scampered across the pitch to keep the ball alive. The pacey wide man wriggled free of Mitchell Roberts, shifted the ball onto his left foot and whipped the ball inside the far post.
Now behind for the first time in the game, Spooner opted to for a change of system and personnel, calling on Ryan Stirk and Dan Djurovic from the bench to provide a much needed spark.
Boyd-Munce went close with a dipping effort from range but it was Redmond who thought he’d found an equaliser.
In Stirk's first meaningful involvement, his deep corner from the right drifted beyond Parkes and seemed to hang in the air. Redmond attacked the ball aggressively, rising above two yellow shirts at the far post but saw his downward header drop agonisingly wide - leaving the Irishman with his head in his hands.
With the clock counting down, Crowley and Gordon sent in a succession of teasing crosses which flashed across the box but evaded everybody. Watford, now intent on seeing the game out, camped inside their half and frustrated Blues with all ten outfield players back defending for the final 15 minutes.
There was still time for Crowley to cannon a volley off the tip of the crossbar but the Hornets remained unscathed by the late Blues onslaught to record a comeback victory in the PLD.
Blues: Rouse, Gordon, Roberts, Davis, Redmond, Campbell, Crowley, Boyd-Munce, Andrews, Fernandez (Stirk 65), Hurst (Djurovic). Not used: Brooks (GK), Soldevilla, Concannon
Goals: Hurst 11, Fernandez 30,
Bookings: Davis, Redmond