Hornets were two goals ahead through Richarlison and Christian Kabasele before the home side kick-started a sensational comeback through Oumar Niasse.
LEIGHTON BAINES scored a injury-time penalty to complete a stunning second half turnaround at Goodison Park... as Tom Cleverley missed a spot-kick 10 minutes into added time for the visitors.
The Toffees had to bounce back from two-goals down in the second half when Richarlison and Christian Kabasele put Watford ahead on 64 minutes.
But a debut howler by substitute keeper Orestis Karnezis allowed Oumar Niasse to claw Everton back into the game.
Dominic Calvert-Lewin then climbed highest to leave the Everton faithful dreaming of three vital points with 16 minutes left to play.
And against all the odds the comeback was complete when Baines dispatched a 91st minute penalty after Aaron Lennon was bundled to the ground.
Unbelievably, with 12 minutes of added time, Cleverley had the chance to salvage a point from the spot but put his shot wide right at the death.
Unsworth made six changes following the midweek Europa League 3 – 0 defeat by Lyon but for well over an hour the Toffees looked stuck in a downward spiral.
Richarlison put Watford ahead a minute after the interval as questions were again asked about the home defence that has conceded more Prem goals than at any time since 1994.
And the Everton fans were left dismayed when Kabasele beat Phil Jagielka in the air to double their advantage.
But a string of inspired subs by Unsworth, including hooking Wayne Rooney off for Calvert-Lewin sparked Everton into life.
It was a crucial win for Everton which lifts them out of the bottom three, two points clear of the drop zone.
The three points is unlikely to convince the board that Unsworth is the man for the job and now the task over the international break is to appoint a new manager.
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Everton caretaker boss David Unsworth: "We've done it the hard way, but showed incredible spirit and fight. The crowd helped us, they were incredible.
"I'm very confident with Leighton, he's taken a lot of penalties. If anyone was going to stick in the back of the net, it was him.
"Whatever will be will be. I have been the proudest man in the world to take charge for the last two weeks and no one can take that away from me."
Watford striker Andre Gray: "We deserved all three points but we completely fell apart after they scored.
"We are professionals and we have to deal with that. It's frustrating to miss the penalty but I would feel the same if Tom Cleverley had put it away and we came away with a point."