Watson struck on 61 minutes when his fierce shot took a wicked deflection off defender Paul Robinson and looped over stranded keeper Alec Chamberlain.
But readings real hero was keeper Markus Hahnemann, who brilliantly saved a Neil Cox penalty as he preserved his fourth successive clean sheet.
The giant American keeper blocked Cox's stinging spot kick on 20 minutes after James Harper was adjudged to have handled Jamie Hands flick.
But Watford would have felt doubly hard done by as Harper's intervention guided the ball beyond Hahnemann and over the goal line only for referee Frazer Stretton to point to the penalty spot.
The visitors also saw an Allan Neilsen effort disallowed for offside as they had the better of the first half, but Reading responded well as they took the game to Watford after half-time.
But Reading's biggest slice of fortune came just after the hour when Watson's effort found its way in.
The midfielder had already seen two long range efforts fly woefully wide but saw his luck change in an instant as his first goal of the season clinched all three points for Reading.
Jamie Cureton came close to doubling Reading's lead when he forced a Harper corner against the bar from only two yards out.
And the home side were made to endure a late onslaught and a five minute spell of injury time in which on-loan Arsenal defender Matthew Upson was forced off with a head injury that required sticthes, before securing a seventy league win in nine games.
Relieved Reading boss Alan Pardew said: "I thought we deserved the win but it was tight.
"We needed a bit of luck and Kevin certainly need the deflection as he was never going to hit the target !For the penalty, I had a feeling Markus would save it and he has been a different class all season."
Watford boss Ray Lewington also praised the American keeper saying: "He has won them the game.
It was a magnificent save and we did not get the luck, the lads are feeling sorry for themselves but we will play worst than that and win."