Salomon Kalou scored an injury-time header to ensure Chelsea remain six points behind Manchester United.
Kalou is congratulated by his team-mates after scoring late on
Chelsea seemed certain to slip eight points behind the leaders after a frustrating afternoon before Kalou converted Andrei Shevchenko's cross.
Both sides spurned earlier chances, with Michael Ballack missing the ball and Ben Foster denying Didier Drogba.
Petr Cech made excellent saves from Damien Francis and Steve Kabba, who also missed a chance from six yards.
The keeper's heroics ensured a seventh successive clean sheet in the Premiership, and a seventh straight win, for the Blues as they cling to United's coat-tails.
The leaders had extended their lead over Chelsea to nine points earlier in the day with a 4-1 win over Blackburn, while Watford's relegation rivals West Ham and Charlton also won.
Watford now find themselves 11 points adrift of safety - while Chelsea remain in the hunt for the title.
For so long it seemed as though Chelsea's challenge would founder at Vicarage Road after Watford battled manfully - and Kalou's winner was a painful blow for the home team.
Chelsea skipper John Terry's afternoon had got off to a painful start when Darius Henderson accidentally caught him with a stray elbow in the first minute of the match.
The defender spent several minutes receiving treatment but was eventually able to continue.
Terry's difficult opening might have seen him concede a penalty after he appeared to handle Tommy Smith's cross but referee Uriah Rennie turned down Watford's vociferous appeals.
Watford's positive start continued when Kabba forced a save from Cech with a spectacular overhead kick, while Henderson shot wide on the turn and, later, directed a weak header at goal.
Chelsea had a penalty appeal of their own turned down when Lampard - playing with a support on his broken wrist - went down after a clumsy challenge, while Foster made a brilliant save with his legs to deny Drogba.
It was a far from convincing opening 45 minutes by the champions, who struggled to come to terms with the robust style of the home team.
Aidy Boothroyd's team hurried and harried the champions, while Terry found himself dragged into an on-running verbal spat with Henderson.
Chelsea might even have found themselves trailing minutes after the restart but for Kabba's awful miss, the 26-year-old failing to hit the target from six yards after Henderson played the ball to him at the far post.
Frustrations started to show, with Jose Mourinho and Boothroyd exchanging words on the touchline.
And Mourinho had used all his substitutes by the 58th minute - a measure of how difficult Watford made life for his team.
But Chelsea should have scored seconds later when the ball fell invitingly for Ballack six yards from goal only for the German to completely miss it with his attempted shot.
Lampard appeared to be through on goal but was thwarted by a excellent block by Jay DeMerit.
The late drama almost belonged to Watford, Cech making an excellent save at the far post to deny Francis - and shortly afterwards Kalou struck with his decisive header at the other end.
Watford boss Adrian Boothroyd:
"It is hard to take. I'm proud of my team but disappointed.
"We did very well in many aspects. It was scrappy and we wanted it that way to make it difficult for them.
"What pleased me was that last time we played Chelsea we looked like little boys out autograph hunting but we stood up to them this time."
Chelsea boss Jose Mourinho:
"I think that if we had gone from six points to eight or nine behind Manchester United, mathematically it would still be possible to win the title but mentally not.
"Every game is crucial. If we win every game then I think we can be champions.
"Maybe the draw was a fair result. We have a strong group and we have to go all the way in every match."
Watford: Foster, Chambers, DeMerit, Shittu, Stewart, Smith, Mahon, Francis, Rinaldi, Henderson (Priskin 69), Kabba (Bouazza 81).
Subs Not Used: Lee, Doyley, Bangura.
Chelsea: Cech, Geremi (Ferreira 46), Carvalho, Terry, Ashley Cole (Mikel 58), Makelele (Kalou 46), Lampard, Ballack, Wright-Phillips, Drogba, Shevchenko.
Subs Not Used: Cudicini, Boulahrouz.
Booked: Wright-Phillips, Ferreira, Carvalho.
Goals: Kalou 90.
Ref: U Rennie (S Yorkshire).