A minute's applause was held before kick-off for Forest owner Nigel Doughty who died last weekend and it was the home side who dominated for long spells.
They deservedly went in front through Garath McCleary's 25-yard strike before Deeney equalised a minute before the break.
Forest pressed in the second half and Chris Gunter was unlucky to see a volley hit the bar, while John Eustace also crashed a shot against the woodwork.
The result ended Forest's six-match losing run in the league at home but they remained five points adrift of safety, while Watford extended their unbeaten run to three matches.
Forest manager Steve Cotterill fielded a new-look back four with loan signings George Elokobi, Danny Higginbotham and Scott Wootton starting alongside returning captain Luke Chambers.
Watford went into the game looking for a third successive victory and manager Sean Dyche kept faith with the side that had started the previous two matches.
The home side started well and Ishmael Miller almost got through on goal from a Marlon Harewood flick on before Adlene Guedioura saw a shot blocked.
Forest fans had not seen their team score in the last seven home matches but with 19 minutes gone they had a goal to cheer when McCleary's 25-yard effort went in off the post to give the Reds the lead.
Nottingham Forest immediately went in search of a second and Gunter was sent through but his lob over Scott Loach was cleared away.
Moments later, Miller also had a clear sight of goal only to see his shot well saved by Loach.
Watford responded and almost levelled when Jonathan Hogg's header found Eustace unmarked but his header was parried away by Lee Camp.
With a minute of the half remaining Watford drew level when Sean Murray's lofted free-kick was met by Deeney who headed past Camp.
Forest looked to have regrouped at the start of the second half and McCleary picked out Miller who fashioned some space for a shot but his effort was blocked.
Harewood also went close with a free-kick from 30 yards that had Loach scrambling.
The hosts went even closer to going back in front when Harewood picked out Gunter and his thundering volley cannoned off the crossbar.
Watford still looked dangerous themselves and Adrian Mariappa had a near-post header saved by Camp before Eustace saw a shot hit the bar.
Gunter had been at the centre of most of Forest's dangerous moves and he had another chance with 12 minutes remaining but fired over from 12 yards.