Watford scored three late goals to make manager Javi Gracia's first home game an "unforgettable night" and increase the pressure on his Chelsea counterpart Antonio Conte.
The Blues played an hour with 10 men after Tiemoue Bakayoko's red card capped a dreadful individual 30-minute performance - in which he gifted Watford four chances.
The Hornets - who had won only one of their previous 12 Premier League games - led controversially as Gerard Deulofeu went down easily under keeper Thibaut Courtois' challenge and Troy Deeney scored the penalty.
Chelsea, who brought on Olivier Giroud for a debut in the second half, scored an undeserved equaliser when Eden Hazard curled home brilliantly from 25 yards.
But, two minutes later, Daryl Janmaat scored a fantastic goal of his own when he cut in from the right wing, played a one-two with Roberto Pereyra and beat another couple of defenders before scoring with his weaker left foot.
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Deulofeu added another when he ran from halfway before his shot was deflected home by Gary Cahill - and Pereyra scored a fourth from Abdoulaye Doucoure's through ball.
The Hornets are now six points above the relegation zone.