Blues were narrowly beaten at Vicarage Road by a first-half strike from Brummie strker Troy Deeney.
Deeney, continuing his rich scoring form against his hometown club by putting Watford in front with a scrappy goal in the 32nd minute.
Blues cranked it up a gear in the second-half and put the Hornets under pressure but couldn't find a way through.
Afterwards, Lee Clark felt Blues were the better side and that only added to his frustration at not getting at least a point from this fixture. The manner in which Deeney scored, for the third consecutive match against Blues, and the very fact that Darren Randolph was rarely tested after the break also won't have made the manager's journey back to the second city any easier.
The visitors scared the Hornets early on by twice hitting the woodwork. Chris Burke's cross/shot was tipped on to the the bar by Manuel Almunia in the seventh minute before Paul Caddis unleashed a 35-yard rocket four minutes later that rattled the left apex.
Watford, often sloppy in possession, were forced into an early change when Joel Ekstrand hobbled off to be replaced by club stalwart Lloyd Doyley in the 18th minute.
The manner in which the hosts opened the scoring summed up what was a frustrating evening for the Blues. Fernando Forestieri pulled the ball back from the left for Deeney, 12 yards, who initially missed the ball with an air kick. However, the 25-year-old wasn't closed down quick enough and had a second bite of the cherry; this time watching his strike deflect off Paul Robinson and beyond the already-committed Randolph.
With Reece Brown on for Albert Rusnak at the break, Blues started the second-half with even greater purpose and regularly had Watford on the back foot.
However, it wasn't until the closing stages, with Lee Novak and Peter Lovenkrands stepping off the bench to form part of a 4-4-2, when Blues created their best chances.
Lovenkrands was played in down the right of the area and looked to have only Almunia to beat but his selfless option to set up Federico Macheda in the middle proved to be the wrong one.
Will Packwood looked to have snatched a deserved point and his first goal for the club deep into injury time. Randolph's free-kick from deep found the head of the American but his flicked effort shaved the outside of the right post.