Lee Miller headed home his second goal of the season from a Mickey Bell cross four minutes into extra time to give City victory in a game that was less than inspiring.
Watford, who went into the game near the bottom of Division One after a poor start to their season, made a bright opening as a Neil Cox shot was charged down by Tony Butler within the first 90 seconds.
But it was City who had the best chance in the opening stages, with a Lee Miller header from an Aaron Brown cross flashing inches wide.
City exerted more pressure as the game went on and could have opened the scoring after half an hour, when Luke Wilkshire's corner to the far post was headed over the bar by Tony Butler, who had come up from defence.
Tommy Doherty and Christian Roberts both had long range efforts, but Miller went close to scoring in first-half injury-time with a fantastic volley that was brilliantly saved by Watford keeper Alec Chamberlain.
With 20 minutes of the match to go, Watford started to create some opportunities of their own.
First Danny Webber, signed at the beginning of the season from Manchester United, fired in a shot which was blocked by Wilkshire and minutes later Jamie Hand forced Steve Phillips into action with an effort from the edge of the area.
Watford striker Bruce Dyer tested Phillips from long range with only two minutes to go in normal time and then wasted a chance from Lee Cook's cross moments before Miller nodded in the winner.
Roberts nearly clinched the tie in the final minute, but his effort struck a post.
City: Phillips, Carey (Fortune), Butler, Coles, Bell, Wilkshire, Tinnion (Matthews), Doherty (Hulbert), Aaron Brown, Roberts, Miller. Subs not used: Stowell, Lita.
Watford: Chamberlain, Doyley, Cox, Dyche, Robinson, Devlin, Mahon, Young (Cook), Fisken (Hyde, (Hand)), Dyer, Webber.
Subs not used: Hitchcock, Fitzgerald.