Having seen Bournemouth, Norwich City and Middlesbrough all win on Tuesday, the pressure was on Slavisa Jokanovic's men to respond in the four-way title race.
Odion Ighalo opened the scoring with a header in the fourth minute - his 16th league goal in 2015 - before Matthew Connolly added a second four minutes before the break.
Forest saw Kelvin Wilson sent off just before the hour for retaliating to pressure from Ighalo and although Gary Gardner pulled one back, Almen Abdi rounded off the win for Watford three minutes from time.
The win sees Watford move up to third, level on points with second-placed Norwich and one adrift of leaders Bournemouth, while Boro are a point further back.
Elsewhere in the Championship, Rotherham United moved five points clear of the drop zone with a 1-1 draw at Fulham - Matt Derbyshire's early opener cancelled out by Ross McCormack.
In League Two, there was a dramatic conclusion at the Pirelli Stadium as leaders Burton Albion rescued a last-gasp 1-1 draw with Carlisle United, who had taken a second-minute lead through Danny Grainger.
Burton were awarded a penalty in the fifth minute of stoppage time, only for Damien McCrory's effort to be saved, but they did salvage a point in the eighth minute of time added on when Denny Johnstone struck.
Burton will clinch promotion on Saturday if they defeat Morecambe and Bury fail to win at Portsmouth.
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