United, five points clear of Charlton with two games to go, survived a nail-biting second half in which Marlon King hit the woodwork as their nervy fans waited for the final whistle.
It was a rare home victory over the Vicarage Road side, already relegated after chalking up just four league wins since winning promotion via the play-offs.
Adrian Boothroyd's side produced a battling performance and tried their luck early in the game with two early long range strikes from Hameur Bouazza which flashed wide of the United goal.
The Sheffield side should have snatched the lead on 16 minutes after Chris Armstrong's long ball upfield fell nicely for Christian Nade, who rounded Ben Foster but the French striker's first touch was poor as the Watford keeper scrambled back to block Nade's low drive six yards out.
Watford escaped in the 35th minute when striker Jon Stead went down after an elbow from Clarke Carlisle, who had been booked 16 minutes earlier.
But, in what appeared to be a case of mistaken identity, referee Martin Atkinson instead cautioned Dan Shittu.
United, hampered by Watford's stubborn defending, had luck firmly on their side as they snatched the lead in the 44th minute.
Midfielder Michael Tonge drilled in a hopeful shot which came off the head of Powell and the ball spun past the helpless Foster.
King fired a shot from the edge of the box inches over the top after neat work by Tamas Priskin, before Foster pulled off a stunning one-handed stop diving to his left to keep out Keith Gillespie's stinging drive from 20 yards.
The Watford keeper was helpless minutes later as centre-back Chris Morgan rose unmarked but his header hit the top of the net as United looked to kill them off.
Watford almost levelled matters in the 65th minute as King shrugged off a challenge from Morgan to lob the ball overt the advancing Paddy Kenny only to see it crash against the bar.
Substitute Darius Henderson escaped a red card after a blatant elbow on Armstong ten minutes from time.
In the closing stages, Gillespie was foiled again by Foster who dived at the near post to keep out the winger's right-foot strike.