They moved within three points of the next club much to the delight of the manager Gary Megson.
When he took over Forest were nine points adrift, second from bottom in the table but they now have real hope of escaping the drop.
Watford had the better chances in the first half with Neil Cox and Chris Eagles having headers blocked near the line following a corner then Johnnie Jackson, on loan from Spurs, headed just off the target following a cross by James Chambers.
Twice Forest's impressive Darryl Powell went close. He should have done better when afforded a free header at the far post following a corner, but he cleared the target. On the next occasion he sent in a shot straight at keeper Richard Lee.
The young Watford keeper dropped a clanger just a minute before the interval when he dived to his left as he totally misjudged a stinging, swerving drive from Kris Commons. The ball entered the net in the centre of the goalmouth leaving Lee red-faced.
Watford tried to pull back in the second half but could make no real impact until it was too late as Commons had another shot but this time Lee was behind it.
Yet after 78 minutes Lee was beaten again. This timer the Watford defence shot itself in the foot, when James Chambers skied a clearance and Cox hesitated in his attempt to clear.
Scott Dobie wrested the ball away for Powell to break down the left and take out the keeper with his cross to leave Commons with a simple strike.
Watford rallied with Bruce Dyer twice going close. On one occasion his shot was blocked and another it was cleared by Dobie.