A topsy-turvy encounter in which both sides gained and squandered a lead ended with late drama when - three minutes into stoppage time - Miguel Britos was on hand to head home on the line after Simon Mignolet could only push Nordin Amrabat's close-range effort onto the bar.
It was the hosts that had opened the scoring in the eighth minute when Stefano Okaka took advantage of some slack Liverpool defending from a corner with the Hornet man rising unmarked to powerfully head home.
Liverpool levelled on 29 minutes through Sadio Mane after Alberto Moreno played a delightful through ball that the Senegalese playmaker then took past the defence and opening up his body brilliantly to place the ball into the top corner.
Watford regained the lead just 161 seconds later when the Hornets once again took advantage of poor Liverpool defending with Abdoulaye Doucoure finishing from close range.
The visitors pulled themselves back into the game and bagged their second from the penalty spot ten minutes after the break. Mohamed Salah was brought down by Heurelho Gomes with the referee rightfully pointing to the spot, Roberto Firmino sending the keeper the wrong way to level matters.
Two minutes later and Liverpool took the lead for the first time when Salah was on hand at the back post to convert after a Firmino cross-cum-shot found his team mate.
Liverpool looked on course for the three points after taking control of the game but will rue another defensive lapse late on as they were pegged back.