Ahmet Brkovic grabbed a second-half equaliser for Luton at Vicarage Road that all but ended Watford's hopes of automatic promotion to the Premiership.
Marlon King's gave the Hornets a first-half lead but Brkovic struck 17 minutes from time and Adrian Boothroyd's men, who have taken just one point from their last three matches and are nine points adrift of second-placed Sheffield United, look destined for the play-offs.
In the 22nd minute, Lloyd Doyley's mistake let in Steve Howard, who mis-hit his shot - only for Watford skipper Gavin Mahon to head the ball straight to the unmarked Warren Feeney, who volleyed wide.
Kevin Foley provided another example of Luton's poor finishing when, unchallenged by the home defence, he was allowed to carry the ball from inside his own half before dragging a left-footed shot wide from 22 yards.
And in the 36th minute, King showed Mike Newell's men how it was done with a superbly-taken goal.
Latching onto Ashley Young's clever flick, King outpaced Markus Heikkinen before placing a perfectly-judged, first-time lob over the head of goalkeeper Marlon Beresford for his 20th goal of the season.
Luton almost levelled in the 43rd minute when Watford 'keeper Ben Foster - shaky throughout the half - struck an intended clearance against Carlos Edwards, but recovered to dive on the ball just in front of his goalline.
In first-half stoppage time, Beresford kept his team in it by saving well from King and Chris Eagles.
Foster had endured a dreadful first half, but he redeemed himself after the interval by making two crucial interventions.
First he denied Leon Barnett - a first-half replacement for the injured Sol Davis - with an impressive reaction save after the defender's 15-yard volley had flown through a crowded penalty area in the 50th minute.
And 15 minutes later, Foster made a fine low stop to his right to keep out Steve Robinson's close-range shot after the Watford defence had failed to clear Brkovic's cross from the right.
Young - one of Watford's best players this season - made a speedy incursion from the right and hit a 15-yard shot that was blocked by Heikkinen after 69 minutes.
But in the 73rd minute, Luton scored the equaliser they probably deserved when Edwards' long throw from the right reached Brkovic, who prodded the ball into the net at the far post.
Watford defender Malky Mackay headed in Young's free-kick late on, but the goal was disallowed for offside, and in stoppage time Beresford saved brilliantly from King.
Teams
Watford Foster, Doyley, Mackay, DeMerit,Stewart (Chambers 66), Eagles (Bangura 67), Mahon, Spring,Young, Henderson, King.
Subs Not Used: Chamberlain, Carlisle, McNamee.
Booked: Doyley, King.
Goals: King 36.
Luton Beresford, Foley (Morgan 90), Davis (Barnett 17),Perrett, Heikkinen, Edwards, Robinson, Brkovic, Howard,Feeney (Vine 68), Showunmi.
Subs Not Used: Brill, Holmes.
Booked: Showunmi, Howard, Heikkinen.
Goals: Brkovic 73.
Att: 15,922
Ref: M Dean (Wirral).