Tom Cleverley smashed home an injury-time winner to give Watford their first home victory of the season and lift them into the Champions League places.
Per Mertesacker headed home his first Premier League goal since December 2013 from a Granit Xhaka corner to give the Gunners the 39th-minute lead. It was Arsenal's first away goal of the season.
Troy Deeney levelled from the spot after 71 minutes when the outstanding Richarlison went down easily under challenge from Hector Bellerin and referee Neil Swarbrick awarded a soft spot kick.
The goal ended the Watford talisman's run of 13 league games without a goal stretching back to April - his longest drought for six years. It was the first Premier League goal Arsenal had conceded since August 27 at Anfield.
Mesut Ozil came off the bench after an hour but shot tamely straight at Heurelho Gomes when through on goal.
Fellow sub Etienne Capoue hit the post after 83 minutes when his shot deflected off the head of Mertesacker.
In the 92nd minute, Petr Cech saved from Deeney and then Mertesacker blocked a shot before Cleverley swept the rebound into the roof of the net.
Neither Alexis Sanchez nor Aaron Ramsey were in the squad after their international exertions as Arsenal extended their unbeaten run to eight games.
The win sees Watford, who lost their last game at Vicarage Road 0-6 to Manchester City, climb above Chelsea and Arsenal into fourth place.
Watford XI: Gomes, Kabasele, Mariappa, Britos, Femenía, Doucouré, Cleverley, Holebas, Pereyra, Gray, Richarlison. Subs: Karnezis, Wagué, Janmaat, Watson, Capoue, Carrillo, Deeney.
Arsenal XI: Cech, Koscielny, Mertesacker, Monreal, Bellerin, Elneny, Xhaka, Kolasinac, Welbeck, Iwobi, Lacazette. Subs: Ospina, Holding, Coquelin, Wilshere, Ozil, Walcott, Giroud.
Graham Poll: Watford penalty decision wrong
Graham Poll hit out at referee Neil Swarbrick’s decision to award Watford a penalty in their Premier League clash with Arsenal.
Richarlison went down in the Gunners box under a challenge from Hector Bellerin, and Swarbrick immediately pointed to the spot.
Initially it looked as if the referee had made the right decision, but replays suggested the Brazilian had in fact gone down a little too easily.
Bellerin definitely made contact with Richarlison, but the Watford man looked as if he was waiting for the touch and was already on his way to ground.
5 things we learned
Troy Deeney and Tom Cleverley both found the net as Watford came from behind to beat a lacklustre Arsenal at Vicarage Road.
Deeney stepped off the bench, up to take a penalty, and on to the scoresheet to net the equaliser before Cleverley added the winner in stoppage time
Per Mertesacker, making his first Premier League start in more than a year, had headed the visitors in front before Hector Bellerin brought Richarlison down in the box and provided Deeney with the platform to equalise.
Cleverley then condemned Arsenal to yet another away loss in the final minutes.
Here are five talking points from the game at Vicarage Road.
FT Watford 2-1 Arsenal
It’s another one of those away days for Arsenal.
After looking solid in the first half, the game was turned on its head in the second 45.
Watford were more dogged, more determined and more ruthless than the Gunners.
Full reaction to come.
GOAL! WATFORD SCORE!
Unbelieveable scenes!
Watford win it right at the end!
Cleverley smashes home after the ball fell for him perfectly!
Furthermore to the earlier penalty stat, something else is not looking for Arsenal.
Petr Cech doesn’t save many penalties at all.
In fact, he’s never saved one for Arsenal!
In pictures: Deeney levels the scoring
There was never going to be any doubt with this man from the spot.
Deeney smashed the ball home, down the middle as expected.
Watford are good value for the point if they can hold on.
Worrying stat for Arsenal.
They are giving away a lot of penalties.
More than anyone else in the league!
GOAL! Watford level it up from the spot!
Troy Deeney from the spot for Watford!
He thumps it home and Watford have their equaliser!
Controversial decision from the referee as Richarlison is brought down by Bellerin - but it was very, very soft.
Watford are pushing to try and earn their way back into this game.
They have just over 20 minutes to find a breakthrough.
Arsenal are going for a change of dynamic with Lacazette being replaced by Giroud.
Bit of a blow for Arsenal as Welbeck goes off with a bit of an injury.
Ozil replaces him.
A collision with Watford goalkeeper Gomes seemed to be the incident to cause that.
Watford are in need of something to swing their way.
At the moment they are not getting the rub of the green and are struggling to get anything going.
Marco Silva has done an impressive job since arriving in England - does he have the answer here?
In pictures: Mertesacker heads Arsenal ahead
Arsenal go ahead through Mertesacker’s header.
The marking was pretty atrocious and it was a free header for the German.
A great way to mark his return to the starting XI.
HT Arsenal lead 1-0
Neil Swarbrick blows his whistle and that’s it for the first 45.
Arsenal lead by a goal to nil, thanks to Mertesacker’s header.
The game hasn’t been much of a spectacle, but Arsenal probably just deserving of the advantage.
GOAL! Mertesacker gives Arsenal the lead!
We have ourselves a breakthrough!
Mertesacker, making his first start in the Premier League for the Gunners for 18 months, gets the goal.
It’s a simple, powerful header from a corner. Superb stuff.
Somehow, this game is almost more dull than the Liverpool vs Manchester United game earlier.
Not much to report on of note.
Looks like this could be decided by just the one goal.
Still tough to separate the two sides here.
Watford looking reasonably intent on attacking.
Richarlison looking the most lively player on the pitch.
A huge banner was unveiled by the Watford fans ahead of kick-off.
It covered the entire stand behind the net.
Very impressive!
Fairly cagey start from both sides here.
Kolasinac has probably had the best of the chances so far for the Gunners.
He squared the ball for Welbeck but the defenders could clear the danger.
PEEP! We are underway
Watford get us underway at Vicarage Road.
An important game for both teams.
Should be a cracker!
Marco Silva wants to see his players relax for this afternoon’s game.
He says that he wants to see his team enjoy themselves.
He is under no illusions how tough the game will be, however.
Draxler drops Arsenal hint on social media
Arsenal fans are convinced Julian Draxler has dropped a transfer hint on social media by sharing an image of a Gunners shirt with Sead Kolasinac’s name on the back.
The Paris Saint-Germain star has been an Arsenal target for some time, and was on their radar over the summer when it looked as if Alexis Sanchez would be moving on.
PSG then splashed out on Neymar and Kylian Mbappe, strengthening the notion that Draxler could be on his way to the Emirates.
But the Germany international opted to knuckle down in Paris, and fight for his place in the first team, and has so far made six appearances this season.
That said, it is looking increasingly likely that both Alexis Sanchez and Mesut Ozil, who have yet to sign contract extensions at Arsenal, could be gone before the end of the season.
And Draxler will certainly be top of Arsene Wenger’s shopping list should the Frenchman need to strengthen his attack.
The scene outside the ground
This is cool from Arsenal’s social media team.
A view of the scene outside of the ground, as the away fans make their arrivals.
Nice little feature.
Arsenal arrive
Arsenal are looking to continue their good form at Vicarage Road today.
Manager Arsene Wenger has turned around the Gunners’ early season misery expertly over the past month.
But a tough task awaits against Watford today.
Arsenal starting XI
There is no Alexis Sanchez in the Arsenal team.
The Chilean is not ready after international duty.
Danny Welbeck and Alex Iwobi will be playing behind Alexandre Lacazette.
Watford starting XI
Andre Gray and Richarlison will be leading the line for Watford.
The Hornets also have options on the bench, with Troy Deeney and Etienne Capoue at their disposal.
Wenger growing increasingly frustrated with Ozil
Mesut Ozil arrived as the world-class superstar signed to take Arsenal to the next level.
Four years on, he has been left in limbo after being caught in a contract stalemate which just about sums up his Arsenal career.
Ozil, 29 on Sunday, wants a new deal worth £350,000-a-week. The club has baulked at his demands and no-one else has made an offer.
The Germany midfielder, signed for a then club record £42.5million, is out of contract at the end of the season, Arsenal fans are divided over him and even Arsene Wenger appears to be losing faith.
Boss Wenger has defended him to the hilt but Ozil is no longer a guaranteed starter which is a reflection of the uncertainty surrounding his future.
Draxler drops Arsenal hint
Arsenal fans are convinced Julian Draxler has dropped a transfer hint on social media by sharing an image of a Gunners shirt with Sead Kolasinac’s name on the back.
The Paris Saint-Germain star has been an Arsenal target for some time, and was on their radar over the summer when it looked as if Alexis Sanchez would be moving on.
PSG then splashed out on Neymar and Kylian Mbappe, strengthening the notion that Draxler could be on his way to the Emirates.
But the Germany international opted to knuckle down in Paris, and fight for his place in the first team, and has so far made six appearances this season.
That said, it is looking increasingly likely that both Alexis Sanchez and Mesut Ozil, who have yet to sign contract extensions at Arsenal, could be gone before the end of the season.
And Draxler will certainly be top of Arsene Wenger’s shopping list should the Frenchman need to strengthen his attack.
Arsenal reportedly in for Spanish starlet
Arsenal and Liverpool have been plotting a move for one of Real Madrid’s finest talents not currently in the starting line-up.
Zinedine Zidane’s plethora of talent means star players will inevitably grow disgruntled, there’s no sign of that just yet from Dani Ceballos, but the Spanish sensation could receive a starring role elsewhere.
But while the Gunners and the Reds maintain an interest, Sport believe the Rossoneri will make a strong move in January for the former Real Betis talent.
One of the stars of last summer’s European under-21 championship, Ceballos has sporadically impressed whenever afforded a chance with Los Blancos, but will soon be demanding regular minutes to fulfil his outrageous talent.
Team news
Watford manager Marco Silva will take a late decision on the fitness of Andre Carrillo for the visit of Arsenal.
Carrillo, the winger on a season-long loan from Benfica, played for Peru in their 1-1 World Cup qualifier against Colombia on Wednesday night.
Forward Isaac Success has been ruled out for up to eight weeks with a knee injury, while Sebastian Prodl (thigh) is a doubt and Younes Kaboul (hamstring) remains sidelined.
Arsene Wenger will assess Alexis Sanchez’s physical and mental condition ahead of the trip to Vicarage Road.
Sanchez only arrived back in London on Thursday after missing out on World Cup qualification with Chile but Mesut Ozil and Danny Welbeck are available, having overcome knee and groin injuries respectively.
Shkodran Mustafi suffered a thigh strain over the international break and is set to be out for four to six weeks while Laurent Koscielny (Achilles) and Sead Kolasinac (hip) will be given late fitness tests. Calum Chambers (hip), Francis Coquelin (hamstring) and Santi Cazorla (ankle) are all out.
Watford quad: Gomes, Holebas, Kabasele, Britos, Mariappa, Femenia, Carrillo, Richarlison, Cleverley, Doucoure, Capoue, Gray, Karnezis, Deeney, Wague, Pereyra, Janmaat, Watson.
Arsenal squad: Cech, Ospina, Macey, Koscielny, Mertesacker, Holding, Monreal, Kolasinac, Bellerin, Debuchy, Elneny, Xhaka, Maitland-Niles, Ramsey, Wilshire, Ozil, Walcott, Sanchez, Welbeck, Lacazette, Giroud, Akpom.