Oliver Norwood's stunning free-kick handed the hosts, unbeaten in six, the advantage, but Simon Grayson's men were stunned by a second-half fightback from their struggling visitors.
Udinese loanee Fernando Forestieri netted his first goal for the club, Fitz Hall put the Hornets ahead and although substitute Alan Lee levelled, Deeney - making only his second appearance since being released from prison - kept his cool to win it from the spot.
The home side handed a debut to on-loan Leicester striker Jermaine Beckford and looked threatening early on, Keith Southern's header was destined for the back of the net only for Piccoli Neuton to clear off the line.
The Hornets' first chance arrived from a corner which was delivered by Forestieri and headed over by fellow Italian Marco Cassetti.
And they pressed again minutes later as Forestieri danced his way past Peter Clarke and hit a superb curling effort just wide of the far upright.
But it was the Terriers who broke the deadlock, and in some style too. Almen Abdi fouled Beckford and Norwood stepped up to steer home a breathtaking free-kick from 30 yards out.
It was the midfielder's third goal in as many matches, having only scored three in his fledgling career prior to that run, and it took his side temporarily top of the pile.
As the home fans rejoiced in that fact, Deeney, who served three months for affray, almost curtailed their celebrations but his header cleared the bar.
Forestieri should have sparked his team back to life early in the second half but he miscued wide when well placed.
The miss nonetheless served as encouragement to Gianfranco Zola's side and they drew level after 68 minutes when Forestieri's shot deflected off Clarke and crept past Alex Smithies.
Beckford's underwhelming afternoon was brought to an end 11 minutes from time as he made way for Lee but it was the away side who struck next before the veteran striker could make his mark.
Hall turned home substitute Mark Yeates' cross from close range and an upset was on the cards.
Lee, however, had other ideas and having replaced the man who made all the headlines pre-match, he looked set to have written one of his own when he netted a bullet header with six minutes left.
The final say went to Watford, though, when Cassetti was fouled in the box and Deeney converted the subsequent spot-kick for his first goal of the season.