An already injury-ravaged Hornets side had suffered another blow when they lost Mart Poom to a dislocated shoulder after barely 90 seconds, before an astonishing sequence of events started to unfold in the 13th minute.
It initially looked like Andre Bikey had been unfortunate not to score with a header that cracked back off the crossbar after Stephen Hunt's corner had been chested back towards his own goal-line by John Eustace and Noel Hunt had hooked the ball back across the target.
By that stage though, linesman Nigel Bannister was already flagging and, following a conversation with referee Stuart Attwell, a goal was awarded, much to the disbelief of players and fans alike.
However, a video replay subsequently showed what a shocking mistake the officials had made because after Eustace chested the ball down it did not bisect the goalposts, but went two to three yards past substitute keeper Scott Loach's left-hand post and was then hooked back across the six-yard box by Noel Hunt.
Watford were understandably rocked by the setback and it took a terrific save from Loach to stop Jimmy Kebe from making it two soon after.
To make matters worse, the home side then lost Jobi McAnuff through injury, but their response after the break was terrific.
They were back on terms after 57 minutes when a John-Joe O'Toole shot broke for Tommy Smith in the penalty area and he spun to slam his fourth goal of the season past Marcus Hahnemann.
It got even better for the home side seven minutes later when Loach's long clearance was chested down by Will Hoskins and O'Toole joined Smith on four for the season with a low strike beyond the Reading keeper.
However, Watford's second came after yet more controversy when Watford boss Aidy Boothroyd was sent to the stands by Attwell after protesting a decision too much.
It looked like the home side would hold on for the win, but four minutes from time Lee Williamson felled Stephen Hunt in the area and the Reading wideman confidently despatched the penalty.