Goals from Araya Dennis and Jessie Stapleton saw us get our first point of the competition, but a late strike from Phoebie Poole, after Poppy Wilson's second half goal, meant the scores ended level, before the hosts took the extra point in the shootout, which ended 3-0.
Rick Passmoor made one change to the side that were beaten by Sunderland last time out before the international break, with a warm welcome for midfielder Olivia McLoughlin coming in for her first start of the season, replacing Libby Bance, who dropped to the bench.
Dennis gives us the lead
Araya Dennis scored her first goal for the Club.
Searching for a first win since a 4-2 success at Durham, things got off to a flying start for the Foxes, who took the lead on 13 minutes, through loanee winger Dennis.
After some good football in the middle of the park, a defence-splitting ball from McLoughlin, on her return, was latched on to by the No.30, who took a touch, and fired us into the lead with an effort into the bottom left-hand corner.
With the weather constantly changing in north London, City continued to probe for a second but, against a resilient Watford backline, we held a narrow lead at the break
Stapleton scores again
The Irish centre-half has three goals in her last three games.
The hosts, as expected, came out of the traps at the start of the second period and found an equaliser through a clever finish from Wilson on 54 minutes.
Luckily for Leicester, we had a centre-half on the pitch who has been in the best goalscoring form of her career in Stapleton, who directed a header goalwards from Missy Goodwin's corner, making it three in a week, after netting in both of the Republic of Ireland wins during the international break.
Chances inside the final 15 minutes then started to flood through for Leicester, most notably when Alisha Lehmann had an effort cleared off the line, but it was the Hornets who would have the last say, when Poole ensured the game would go to penalties in injury time.
Beaten on penalties
The Foxes are back on Filbert Way next weekend.
Goodwin, Pritchard and Lehmann all stepped up for Leicester, and all three failed to find the net, as Watford took the bonus point after three converted spot-kicks of their own.
Attention for the Foxes now returns to Barclays WSL2 duties when we welcome Southampton to King Power Stadium on Sunday (3pm kick-off), in what will be our first Filbert Way fixture in over a month.
Seven days later, the roles become reversed when we take on the Saints once again, this time away at Silverlake Stadium on Sunday 1 November (2pm kick-off) for a third Players Cup match of the campaign.
Simone Sherwood image courtesy of Watford FC.
All times BST.