Three goals in the space of 18 second-half minutes - Troy Deeney’s strike following an Ismaila Sarr brace - earned the Hornets the points at Vicarage Road.
Adam Lallana hit the post with a half-volley from range shortly after coming off the bench in the second half, but the Reds were unable to muster a clear-cut chance of note against Nigel Pearson’s compact, well-drilled outfit.
Jürgen Klopp’s side’s unbeaten Premier League run therefore ends at 44 matches, but they remain 22 points clear at the top of the table.
Team news
Dejan Lovren and Alex Oxlade-Chamberlain came into Liverpool’s starting XI as Klopp made two changes from Monday’s win over West Ham United.
A minor fitness issue caused Joe Gomez to miss out, while Naby Keita was sidelined with a sore hip.
The starting XIs
First half
Liverpool enjoyed plenty of the ball early on, but Gerard Deulofeu’s scoop onto the roof of Alisson Becker’s net was the first time either goalkeeper looked remotely troubled during an opening that lacked incision from both teams.
With Watford content to sit in deep and look to counter, the Reds were left to dominate possession and Mohamed Salah drilled a right-footed shot into the side-netting as they sought to solve the break-us-down-if-you-can puzzle they’d been set.
A lengthy stoppage due to an apparent knee injury sustained by Deulofeu further broke up a disjointed first period, which ended goalless thanks to alert work from Alisson.
The No.1 first bravely dived at Deeney’s feet as the Hornets captain looked to latch onto a loose ball in the area and then, quick as a flash, was back on his feet to block his subsequent shot.
Second half
Alisson was needed again inside a minute of the restart, the Brazilian this time tipping Sarr’s drive over the crossbar after the forward had sprung in behind Liverpool’s backline.
At the other end, Salah then saw a first-time curler from the edge of the box blocked after smart link-up between Oxlade-Chamberlain and Andy Robertson.
Robertson himself struck at goal soon after, the left-back’s blast being saved by Ben Foster, but it was Watford who would edge in front nine minutes into the half.
Abdoulaye Doucoure received a throw-in inside the area and crossed low from the byline, with Sarr duly sliding in from close range.
And, by the hour, the hosts were two up as Sarr raced onto Deeney’s pass and lifted his finish over Alisson.
Lallana was already set to come on prior to Sarr’s second and Klopp followed through with that decision, the midfielder replacing Georginio Wijnaldum and quickly hit the woodwork with a fine half-volley from distance.
Divock Origi was next to be summoned from the away bench, the forward on for Oxlade-Chamberlain and his arrival seeing Sadio Mane shift to the right flank.
But Watford would strike again 18 minutes from time, Sarr intercepting Trent Alexander-Arnold’s back-pass to Alisson and squaring to Deeney, who placed his shot into an empty net.