The Foxes slipped out of the promotion spots after their fourth defeat of the campaign, as Gianfranco Zola's side completed a deserved win.
Watford started the brighter side and had the first sight of goal after 11 minutes but Troy Deeney blazed his effort from the edge of the area high over the bar.
But the Hornets opened the scoring three minutes later. A clever pass from Fernando Forestieri released Almen Abdi on the right and the midfielder advanced towards Kasper Schmeichel before slotting a low effort into the bottom corner.
Nigel Pearson replaced Danny Drinkwater with Lloyd Dyer at half-time, as he looked for more width from his side, but the change did not have an immediate impact as the second half got off to a quiet start.
And it was Watford who eventually had the first opening as Deeney forced a stop out of Schmeichel with a header just before the hour mark.
Pearson responded by bringing on Martyn Waghorn and Marko Futacs, but his side were soon two goals down.
Schmeichel pulled off a terrific save to prevent Daniel Pudil's effort, but Forestieri pounced on the rebound and tucked away the loose ball.
The visitors replied three minutes later as David Nugent controlled Paul Konchesky's cross and fired a low effort into the corner of the net.
But any hopes of a comeback were scuppered as Zak Whitbread brought down substitute Matej Vydra and was shown his second yellow card of the game.