The Gunners have won five successive home matches in the Premier League and are unbeaten in 10 at the Emirates Stadium since losing to Liverpool on the opening weekend of the season.
Ex-Tottenham defender Younes Kaboul's low free-kick deflected off Aaron Ramsey and inside the near post with only 10 minutes on the clock.
All in all, a disastrous night for Arsene Wenger and his team, made even more frustrating by the fact Chelsea dropped two points at Anfield. We couldn't have had a worse start to the game, with Watford scoring 2 goals in the first 15 minutes.
Arsenal manager Arsene Wenger on the strength of his squad: "I believe that number-wise and quality-wise, we have what is required to do well". Booked: Gabriel, Monreal, Sanchez.
In what was a shocking performance by Arsenal, the home side slumped to a miserable 2-1 defeat at the hands of Watford. After, you come back into the middle but it's a good learning curve to go out on to the flanks because you are pushed against the line, you have to move well to get the ball and you have to have a short technique because there's not much space there. Does not work well with Ramsey, and his positional sense is hard to understand at times.
Premier League sides Hull, Watford upset in FA Cup
In another cup shock, Watford was beaten 1-0 by third-tier Millwall courtesy of Steve Morison's 85th-minute victor . Leeds' misery was complete when their skipper, Liam Cooper, was sent off late on for a second bookable offence.
Etienne Capoue - who like Kaboul played for Arsenal's north London rivals Spurs - burst on to the ball and smoothly slalomed his way past flimsy challenges from first, Francis Coquelin and then Skhodran Mustafi. Tuesday was one of those nights.
Before all that, of course, we have to get through a Watford team in poor form.
The flow of the match had completely changed in the blink of an eye, and the Gunners appeared motivated and ready to flip the score on its head with irrepressible attacking. We did not pass the ball quickly enough and we have to stick to our game, then we are always unsafe. He's so effective as a sub late in the game and it's time that's what his role was.
Arsenal were unable to find ammunition from their sporadic attacking, and they went in at the half-time break second best in many positions. Faded away to nearly nothing after that. In hindsight he should have, and was denied an equaliser when his thumping shot crashed back off the bar.
If anything looked like a straightforward Arsenal home win it was this one.