Coming into the game on the back of an eight-match unbeaten run, Peterborough's Danny Swanson broke the deadlock with a cool finish in a one-on-one situation and Dwight Gayle doubled their advantage on the hour mark.
Lee Tomlin was instrumental in Gayle's goal and the two combined again for the third. The latter was brought down by last man Marco Cassetti, who accrued a red card for his troubles, and Tomlin curled home a delicious free-kick.
Although Mark Yeates and Fernando Forestieri pulled back a couple of goals for the Hornets, it did not alter a result which has huge implications at both ends of the table.
Peterborough took the lead in the 29th minute after Gayle sent a defence-splitting pass through the back four and Swanson steadied himself before planting the ball beyond goalkeeper Manuel Almunia.
Gianfranco Zola's men were livid they were denied a fine chance to level matters when Troy Deeney was tripped inside the penalty area by Mark Little.
However, the only action referee David Webb took was to book Deeney for his protestations.
Zola was clearly disappointed with what he saw in the opening 45 minutes as he called upon Championship player of the year Matej Vydra from the bench at the interval.
That left the Hornets susceptible to the counter attack and the hosts capitalised in the 61st minute when Gayle and Tomlin combined to devastating effect.
The pair found themselves in a two-on-one situation and Gayle passed to Tomlin before racing on for the return pass. Tomlin obliged and Gayle slotted in the 13th goal of his short Posh career.
Watford continuined to push men forward in a bid to find a way back into the contest and once more Gayle led a breakaway. Cassetti was the last man and he hauled down Peterborough's striker on the edge of the box.
Referee Webb issued a red card to the defender and Tomlin stepped up to pick out the top corner from the set piece.
A free-kick at the other end ruined Peterborough's hopes of keeping a clean sheet as Yeates curled a deflected effort into the net following a foul on Deeney.
The same player was once more denied a penalty moments later before Forestieri smashed home a shot from the edge of the area deep into stoppage time, but with barely any time left, Watford ended the day six points behind second-placed Hull with just four games left to play.