The central defender was sent off in the 25th minute at Vicarage Road after tangling with Hornets striker Troy Deeney.
Berra appeared to be holding back Deeney as he burst through on goal, and was dismissed for "denying an obvious goalscoring opportunity".
Wolves launched an appeal against the decision and a meeting of the FA Regulatory Commission agreed that it was a case of wrongful dismissal.
Berra will now not serve a one-match ban and will be available for Saturday's Championship game against Nottingham Forest at Molineux.
Wolves boss Stale Solbakken was enraged by the decision, and he said after the game: "I think I agree with everyone who says it's a very harsh one.
"There's no appeals from anyone, from a Watford player or even the dugout, and I think the referee just created a problem for himself after that."