Marlon King hit a last-gasp penalty to earn Watford victory as the Hornets scored twice in the last four minutes.
With seconds remaining, substitute Steve Kabba was fouled by Neill Collins and King slotted home the penalty.
Wolves had gone in at half-time ahead after Seyi Olofinjana's latched on to Stephen Elliott's clever pass and lofted the ball over Mart Poom.
But with four minutes left Jordan Stewart's free-kick deflected off the wall and go past Wayne Hennessey.
Wolves manager Mick McCarthy
"We made a stupid tackle 25 yards out and one of my players
turned his back to the ball and it was deflected into the net.
"He should have jumped and got it in the face. It doesn't hurt that much. What
we did was unacceptable because we were winning the game.
"Then there was a rash challenge from Neill Collins that gave Watford an
extra-time penalty. There was no need for it and it has cost us.
"We should have seen the game out and kept on
Watford manager Adrian Boothroyd
"Wolves were far better than us for much of the game and you can't brush that
under the carpet. We all know there is a lot of hard work to
"From my viewpoint, after the break I didn't think we expressed a winning
behaviour. I thought we were far too open.
"On another day we could quite easily have lost that game."
Wolverhampton: Hennessey, Collins, Darren Ward, Breen (Edwards 69), Gray, Potter, Kightly, Olofinjana, Stephen Ward, Keogh, Elliott (Bothroyd 74).
Subs Not Used: Stack, Henry, Eastwood.
Goals: Olofinjana 45.
Watford: Poom, Doyley, Shittu, DeMerit, Stewart, Williamson, Mahon, McAnuff, Smith (Kabba 81), King, Priskin (Henderson 48).
Subs Not Used: Lee, Bangura, Mariappa.
Goals: Stewart 87, King 90 pen.
Ref: N Swarbrick (Lancashire).