Neil Adams' side controlled their game on Tuesday, but were wasteful in attack and that came back to haunt them when Johnnie Jackson scored the only goal of the contest in the 86th minute.
Jackson's strike condemned Norwich to a first home defeat of the season against a side who now sit just two points behind them in a table that sees the top eight separated by only three points.
One of the sides in that group is Watford, who drew level at the top with Norwich by beating Brentford 2-1 in Billy McKinlay's first match at the helm.
The Scot took the reins after Oscar Garcia was forced to stand down with health problems, leaving Watford under the guidance of their third different boss this campaign.
Odion Ighalo poked home on the rebound after his first-half penalty had been saved to give the hosts the lead at Vicarage Road, but Jonathan Douglas wiped out the deficit after the break.
It fell to Matej Vydra to settle matters with a stunning finish from outside the box after 70 minutes, though Daniel Pudil's second booking in stoppage time did leave Watford with some late defending to do.
Nottingham Forest spurned the chance to go top as they were held to a goalless draw for the third league game running against Wigan Athletic.
Luciano Becchio's fortuitous goal helped Rotherham United to a 2-0 win over Blackburn Rovers, with goalkeeper Jason Steele's attempted clearance bouncing off the Norwich loanee and into the net.
That followed Kari Arnason's early opener as the hosts wrapped up the three points before the break.
Rock-bottom Blackpool claimed a much-needed point with a 1-1 draw at Middlesbrough, while Derby County climbed to fourth with two late goals to beat Bournemouth 2-0 after the visitors had goalkeeper Lee Camp sent off against one of his former clubs.
Elsehwere, Birmingham City won 3-1 at Millwall, Ipswich Town came from behind to earn a 1-1 draw at Sheffield Wednesday, and Cardiff City caretaker bosses Scott Young and Danny Gabbidon oversaw the same scoreline at Brighton and Hove Albion.
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