Ismaila Sarr scored twice while captain Troy Deeney added a third in a sparkling second-half display from the hosts as Liverpool’s run of victories was brought to a shuddering halt.
The Reds had won their past 18 Premier League games and another at Vicarage Road would have made history as the longest winning run in the English top flight.
But they never got going against a Watford side who were superb from start to finish.
The Hornets had more chances in the first half and only a superb save from Alisson, to deny Troy Deeney, prevented them from leading at the break.
However, Watford deservedly took the lead when Abdoulaye Doucoure squeezed a cross in from the left and the impressive Sarr was there to stab in.
Liverpool had fallen behind against West Ham last week but still managed to grind out a win. However, there was a feeling that this time was different, with the Reds sloppy in possession and lacking bite in attack.
It was no surprise that Watford doubled their advantage. Sarr was put through on goal by Will Hughes and the winger calmly lifted the ball over Alisson and into the net.
Captain Deeney then completed a famous victory, curling into the back of the net from the edge of the area.
This is not a result that is going to halt Liverpool’s title charge with the Reds 22 points clear at the top but it was nevertheless an unexpected and memorable result for Watford.
An off day for champions-elect Reds
There is no getting away from the fact that Liverpool have been simply sensational this season and the only surprise is that they have been able to maintain a consistent level of brilliance for so long.
The Hammers showed that if teams attack the Reds defence then they stand a better chance of upsetting them and that was the case on Saturday as they struggled to deal with the Hornets’ high press.
A couple of wayward clearances from Alisson early on, when the Liverpool goalkeeper was under pressure, provided a hint of what was to come.
The defensive pairing of Virgil van Dijk and Dejan Lovren also looked vulnerable, certainly in comparison to the seemingly impenetrable Van Dijk-Joe Gomez partnership, with Gomez out because of a fitness issue.
It was an off day for the Reds and one that may provide them with renewed spirit to finish off in style what is sure to be a title-winning campaign but we should take nothing away from what was an excellent display by Watford.