The two mid-table sides started the day separated by goal difference alone in the Championship table but it is Watford who now stand within just six points of the play-off places.
Substitute Chris Iwelumo was the catalyst for the turnaround, sparking a comeback which inflicted only Town's second defeat in 11 games and left them still without a win over the Hornets for eight years.
Sean Murray's strike and Troy Deeney's neat lob after a mistake from Carlos Edwards eight minutes from time extended Watford's current hot streak to six games.
The first half at Vicarage Road saw Deeney miss a great chance early on, saved by Alex McCarthy, with Michael Chopra also producing a glaring miss from close range.
But it was Jay Emmanuel-Thomas who opened the scoring with his fifth league of the season in the 18th minute, with the former Arsenal forward capitalising on some hesitant Hornets defending.
A blistering start to proceedings should have seen Watford take the lead after just four minutes but Deeney, clean through thanks to some sloppy Town defending, was well denied by the legs of McCarthy.
Ipswich responded strongly with Emmanuel-Thomas, Damien Delaney and Daryl Murphy, twice, trying their luck before the latter glanced a header narrowly wide.
A free-flowing encounter produced eight shots and four corners in the opening 12 minutes, with the visitors enjoying the vast majority of those.
And they established a deserved breakthrough.
Andy Drury, in for the suspended Grant Leadbitter as Town's only change, delivered a great ball from the left which Emmanuel-Thomas finished well from close range, taking advantage of hesitancy between Carl Dickinson and Tomasz Kuszczak.
The goal seemed to take the sting out of the game with very little in the way of goalmouth action.
That was until Chopra somehow missed a glorious opening in the 33rd minute, firing Emmanuel-Thomas' cross wide from a matter of yards out when it appeared easier to score.
Hornets boss Sean Dyche turned to Prince Buaben at half-time and Iwelumo soon after - both of whom had dropped to the bench - in an attempt to spark an attacking threat that was missing from the home side.
Iwelumo, in particular, provided Watford with a presence they were missing under Joe Garner although the second half was a much more scrappy affair.
But out of nowhere Watford equalised in the 71st minute.
Iwelumo played his part in the build-up as Deeney saw his shot well blocked by Delaney but the ball broke for Murray to convert from the edge of the area.
Ipswich had presented next to no attacking threat in the second half and they were punished in the 82nd minute.
Terrible defending from Edwards allowed Deeney to nip in and chip McCarthy from a tight angle for his seventh league goal of the season.