Deeney struck after 65 minutes as he scored for the fourth successive match to take his goal tally for the season to 16.
Both sides ended the game with 10 men after two red cards in stoppage time. Tommie Hoban saw red for Watford after collecting a second caution and Bakary Sako was dismissed for pushing over Fernando Forestieri after he had been challenged by the Argentinian.
Watford twice had to come from behind against an eager Wolves side who have seen their promotion hopes hit after collecting just a point from their last two games.
Benik Afobe had given the home side the perfect start when he continued his goal-laden spell.
Afobe scored for the seventh time in 11 appearances following his £2million January move from Arsenal with a 14th-minute opener. His haul for the season now stands at 26 following the 19 goals that he scored while on loan at MK Dons.
Watford hit back through Matej Vydra’s 11th goal of the season after 30 minutes, only for Jack Price’s first goal of his career to regain the initiative for Wolves six minutes into the second half.
But Deeney left Wolves with an ongoing battle to reduce the gap between themselves and the top six as Watford extended their impressive run to just two defeats in their last 11 games – eight of which they have won.
Afobe sparked the game into life thanks to a pin-point pass from midfielder Kevin McDonald. McDonald split the Watford defence in two when he rolled the ball into the path of Afobe from the half-way line. Afobe’s pace and eye for goal did the rest as he sprinted clear of the Watford backline before beating goalkeeper Heurelho Gomes at his near post with a clinical piece of finishing.
Watford did try to strike straight back, but their former Wolves midfielder Adlene Guedioura saw his long-range effort comfortably collected by goalkeeper Tomasz Kuszczak.
However, there was nothing Kuszczak could do when Wolves made the mistake of allowing the Watford front pair of Deeney and Vydra the chance to combine. Deeney released Vydra and the Czech Republic international raced clear before rifling a low shot from the edge of the area that whistled past the outstretched left-hand of the helpless Kuszczak.
Despite being pegged back, Wolves just held the ascendancy in terms of possession and Afobe tried to make that count six minutes before half-time when winger James Henry won a tussle with Gabrielle Angella and emerged with the ball. Henry’s cross picked out Afobe and his header was goalbound before Gomes tipped it over his bar.
Unfortunately for Watford there was nothing that the stranded Gomes could do when Price somewhat fortuitously regained the initiative for Wolves.
After Watford had failed to fully clear a Bakary Sako corner, full-back Kortney Hause let fly from 25 yards and the ball took a deflection of Price to fly past the wrong-footed Gomes.
Ben Watson crashed a drive off the Wolves bar as Watford launched a frantic search for an equaliser and their pressure was rewarded when Guedioura returned to haunt his old employers.
Guedioura picked out Deeney in the area and the former Walsall striker stabbed the ball home from eight yards.
Watford then had chances to complete their comeback but Gianni Munari headed wide, before Fernando Forestieri fired well off target from close range as the game moved into added time.