Despite a spirited fight-back, the Rams suffered their second consecutive defeat on the road, as Watford leapfrogged Hull City to claim the second automatic promotion spot.
Jamie Ward’s 73rd minute penalty arrived just too late for the Rams, who battled back from two goals down courtesy of Matej Vydra’s spectacular opener and Joel Ekstrand’s close-range header.
Vydra curled home Watford’s first in style, as he bent the ball beyond the reach of Adam Legzdins
from 30-yards after 35 minutes, before defender Ekstrand nodded in Almen Abdi’s corner midway through the second-half.
Northern Ireland international Ward handed the Rams hope when he fired home from the spot after Richard Keogh had been bundled over the penalty area.
Derby almost found a leveller late on when Paul Coutts’ cross from the right was inches away from connecting with Ward’s outstretched leg, but the hosts managed to hold on in a nervy finale.
The Hornets displayed real flair and finesse with fine touches from on loan striker Vydra in particular and it was the Czech Republic striker who posed the most threat in the opening six minutes when he outmuscled Keogh and burst through on goal. Fortunately for the Rams, goalkeeper Legzdins was well positioned to thwart the forward at his feet, before Vydra’s strike-partner, Alex Geijo scooped the rebound over the crossbar.
A minute later midfielder Marco Cassetti forced Legzdins into a superb reflex save at his near post, prior to Keogh making two superbly timed interventions to deny the hosts during swift counter-attacking moves.
But for all their slick passing football, Derby matched the Hornets with high tempo pressing, and after 10 minutes the Rams created their first clear cut chance of the half when Jamie Ward cut inside from the right and fizzed a 25-yard strike narrowly wide.
Conor Sammon then glanced a header wide from Ben Davies’ right wing cross, before Michael Jacobs elected to pass instead of shoot when he found himself in space inside the visitor’s penalty area.
However, the barrage of Derby attacks were quelled as Watford piled forward in search of an opening goal, and the Hornets soon mustered three golden opportunities to take the lead, all within the space of six minutes.
Firstly defender Joel Ekstrand volleyed over from six-yards out following a corner from the right, and then Vydra broke clear and crossed to the far post where winger Ikechi Anya side footed wide.
Vydra’s clever touches and electric pace was causing the Rams’ back-four the most problems, and the on loan Udinese striker displayed exactly why he has got 19 goals already this season, when in Watford’s third consecutive attack, he drove forward and curled the ball in off the post from 30-yards.
The Rams produced one final effort of the half during injury time, when Paul Coutts released fellow midfielder Craig Bryson inside the penalty area, but from a tight angle, substitute goalkeeper Jonathan Bond frustrated the Scot as he blocked and held his low shot across goal.
During the interval, Nigel Clough introduced Jake Buxton for left-back Michael Hoganson who was struggling with injury, as well as Friday afternoon’s loan signing Chris Martin for his Derby County debut, in place of Jacobs.
The on loan Norwich City striker displayed some neat touches and offered an aerial presence following his arrival on the pitch, but it was Ward who almost unlocked the Watford defence when he picked up Coutts’ clever threaded pass, but his stabbed cross towards Sammon was just too long.
The play quickly switched back in Watford’s favour and as the Rams failed to clear Abdi’s corner, Ekstrand rose highest to nod the ball beyond the reach of Legzdins and hand the hosts a two goal advantage in the 67th minute.
But just five minutes after conceding, Derby were handed a lifeline when Keogh was adjudged to have been bundled over in a crowded penalty area, leaving Ward to fire the resulting spot-kick straight down the middle of the goal and into the net.
The Rams threw everything at the hosts in the final 10 minutes, and almost found an elusive equaliser when Coutts’ low cross was inches away from Ward’s outstretched right leg, but the Hornets held on to maintain their automatic promotion push.
Derby County: Legzdins; Davies, Keogh, Brayford, Hoganson (Buxton 46); Coutts, Hendrick, Bryson, Jacobs (Martin 46); Ward, Sammon (Bennett 72).
Subs Not Used: Fielding, Gjokaj, Doyle, Hanson.
Watford: Almunia (Bond 45), Doyley, Vydra (Deeney 87 ), Abdi, Cassetti, Nosworthy, Geijo (Hogg 75), Battocchio, Chalobah, Ekstrand.
Subs Not Used: Yeates, Forsyth, Murray, Forestieri.
Attendance: 14,425 (929 Visiting Supporters).