Nigel Clough's side bounced back from the midweek Carling Cup defeat against Shrewsbury despite spending most of the game on the back foot.
The strike from Davies, his second of the season having also scored the winner against Birmingham at Pride Park last weekend, secured the Rams' first victory at Vicarage Road since 2009 and their first away win in seven league games.
The Hornets, unchanged from last week's draw at Burnley, should have taken the lead in the first five minutes after Mark Yeates set up Marvin Sordell inside the box, but his effort was well saved by Frank Fielding.
Lloyd Doyley, making his 300th league appearance for Watford, set up Craig Forsyth just five minutes later, but he headed wide.
It was all Watford early on, with Martin Taylor also missing from an inviting position.
Derby's first sight of goal came after 17 minutes through Jamie Ward, fresh from international duty with Northern Ireland, but his long-range effort sailed over the crossbar.
Sordell was in the action once again in the 25th minute but his 18-yard effort was comfortably saved by Fielding.
Watford continued to dominate and Forsyth had another sight of goal five minutes before half-time but he shot wide from the right of the area.
The Hornets continued to press and could have gone ahead after more good work from Yeates, but his cross was headed wide by Sordell towards the end of the half.
Despite making all the running, Watford fell behind after 51 minutes, as Davies struck with a thunderbolt.
He received the ball from Lee Croft 20 yards out, cut onto his left foot on the right side, and rifled an unstoppable shot into the roof of the net.
The goal seemed to startle Watford, and Derby pressed forward with Ward's long-range shot being well saved by Scott Loach.
Watford again poured forward to force an equaliser through the lively Sordell, and his fierce 20-yard effort was tipped around the post by Fielding to deny the Hornets.
The home side went agonisingly close to an equaliser on 79 minutes, Yeates crossed to the head of John Eustace but once again, Fielding thwarted Watford, this time with his feet.
Further invention from Yeates set up substitute Gavin Massey after 88 minutes with the goal at his mercy, but his header was held by the outstanding Fielding.
Massey had another chance to salvage a point in injury time, but he could only head Yeates' corner over the crossbar.