Substitute Jack Smith hit the winning penalty as Watford ran out 4-2 winners. Gavin Mahon, Hameur Bouazza and Jermaine Darlington were the other scorers for the Hornets.
Andy Gray and Andy Liddell scored for United but keeper Paddy Kenny, who saved the opening shot, hit the post when he took United's second penalty. Paul Shaw's effort was later saved.
Normal time ended in controversy as United manager Neil Warncok was sent to the stand after claiming his side should have had a penalty.
Watford should have had the opener just five minutes into the game when Ashley Young drilled a shot wide from just ten yards out after Bruce Dyer cut in a smart low cross from the right.
United were denied the lead by the woodwork three minutes later when Nick Montgomery lashed a spectacular angled shot from the edge of the area.
Jay Demerit might have given Watford the edge in the 38th minute but he headed over from Lloyd Doyley's cross from the right flank.
Seconds before the break Richard Lee produced a brilliant reaction save, diving low to his left to turn away a crisp effort from Gray after Kevan Hurst's shot ricocheted to him as Watford's defence dithered.
United fans were celebrating the lead after 53 minutes when Jack Lester stole in at the far post after Chris Morgan headed on Leigh Bromby's long throw, but the cheers were cut short by an offside flag.
Lester was again close to claiming a goal in the 59th minute when his shot looped into the air and was dropping over Lee. The keeper back-pedalled and caught it, but stepped over the line - but despite United's appeals his outstretched arms were enough to keep Watford safe.
Lee was alert to punch the ball away when Lester was a fraction from heading Liddell's cross home and Hurst fired over from 15 yards.
Ten minutes from the end of normal time Dyer sized up his chance of a winner but Kenny dived low to his right and blocked his shot.
Warnock was sent to the stand by referee Mark Clattenburg after he fumed at the fourth official in the last minute of normal time, when claims for a penalty were dismissed after Demerit appeared to handle in the area.