Gianfranco Zola's team had to win to put second-placed Hull under pressure ahead of their trip to relegation-threatened Yorkshire rivals Barnsley, and they did.
Quickfire goals from Troy Deeney and Nathaniel Chalobah towards the end of the first half saw the Hornets move to within a point of the Tigers.
Substitute Harry Kane pulled a goal back in the 61st minute for Leicester, who remain seventh and will see their promotion hopes extinguished if both Bolton and Crystal Palace win on Saturday.
Wes Morgan should really have put Leicester in front in the 12th minute after getting across Joel Ekstrand at the near post but the Foxes captain headed Matty James' corner over the bar from six yards out.
It looked like an error by Kasper Schmeichel shortly afterwards had gifted the visitors the lead, when he spilled Ikechi Anya's low cross right into the path of Jonathan Hogg but the Leicester goalkeeper reacted brilliantly to redeem himself by deflecting Hogg's point-blank shot over the bar.
Amlen Abdi found space down the left of the area again five minutes before half-time. This time he forced Schmeichel into a good save at his near post and proved to be vital, as from the resulting corner Ekstrand headed the ball back into the danger area at the far post and Deeney reacted quickest to score from six yards out.
Chalobah's bolt from the blue saw Watford quickly double their lead in the 43rd minute, when loose control from Adbi saw the ball roll into the path of the Chelsea man who silenced the King Power Stadium with a rocket of a right-foot shot from 25 yards that hit the back of the net via the underside of the bar, leaving Schmeichel stranded.
The Hornets could have put the game beyond their hosts before the break with stunned Leicester all at sea, when Vydra cut inside Michael Keane down the right side of the box but rather than shoot he tried to set up Deeney. A defender got a touch to the ball to cut out his pass but Hogg arrived on the follow up and his shot had to be cleared off the line by Ritchie De Laet.
Leicester's leading scorer David Nugent was introduced for the second half, replacing Jeff Schlupp, and he made an immediate impact, hooking a volley narrowly wide just 45 seconds after the restart.
Another of Nigel Pearson's substitutes, Kane, went one better shortly after his 58th-minute arrival when he halved the Foxes deficit after Paul Konchesky, attacking from left-back, cut back on to his right foot and his shot was deflected goalwards where Kane was on hand to head home after timing his movement to perfection to remain onside.
As the game became stretched both teams looked dangerous on the counter attack but just lacked that final decisive pass.
Watford sub Cristian Battocchio forced Schmeichel into a parrying save with the last action of the game deep into injury time.