A goal in each half from Admiral Muskwe and Demarai Gray was not enough for the Foxes to take anything from the game, which finished 5-2.
There were four changes made to the side that beat Salford City on penalties in the EFL Trophy in midweek with Vontae Daley-Campbell, Darragh O'Connor, Khanya Leshabela and Layton Ndukwu making way for Adam Leathers, Jack Wakely, Thanawat Suengchitthawon and Gray, as the Foxes reverted to a 4-3-2-1 formation.
The hosts took an early lead when Tyreke Johnson played through Nathan Tella, who made no mistake, sliding the ball into the bottom corner.
It could have been two soon after the seventh-minute opener - Watts went for goal from the edge of the area after the ball fell to him from a corner, but Jakub Stolarczyk was able to claim.
The hosts continued to dominate proceedings as Stolarczyk was forced to deny Johnson from close range, with a diving stop at his near post, before Will Ferry fired wide of target.
But for all their pressure, the Saints initially failed to increase their advantage and with City's first shot on target, the away side levelled.
Gray's free-kick was kept in by Callum Wright at the back post as he flicked the ball across for Muskwe to head in and score his sixth goal in as many games.
Leicester had the opportunity to go in front for the first time when Ben Nelson's header crashed against the bar and back out to Wright, whose acrobatic effort was thwarted by Kingsley Latham in the Saints' goal.
Southampton went straight up the other end and were given the chance to regain their lead when Wakely was adjudged to have tripped Tella in the area. The forward stepped up and converted the resulting spot-kick, despite Stolarczyk diving the right way.
David Agbontohoma then headed narrowly over the crossbar from Jake Vokins's free-kick, before, on the half hour mark, Tella raced past the Foxes backline before firing home into the bottom corner to complete his hat-trick.
Johnson tried to get in on the act when he found space to strike from range but could not hit the target. Despite the early setbacks, City pushed forward and Gray's corner was headed towards goal by Wright but the offside flag went up when Ali Reghba converted from inside the six-yard box.
Tella wasn't finished there and scored his fourth in spectacular fashion, turning, flicking the ball up and volleying home.
Back at the other end, Shane Flynn's low effort was saved by the legs of Latham, but the home side looked a threat every time they attacked, as Ferry was the latest to shoot high and wide of goal.
And Southampton's fifth came on the stroke of half-time. Caleb Watts found Johnson in the middle and he slid in to add his name to the scoresheet.
City started the second half on the front foot and when Wakely was felled on the edge of the box, as Gray stepped up and found the bottom corner with a superbly taken free-kick.
Stolarczyk was then called into action, producing a fine one-handed save to tip Will Smallbone's strike over the crossbar.
But it was the visitors who were now doing the majority of the pressing and when Gray flicked the ball through for Muskwe to race onto, Latham had to save with his legs.
The lively Tella then had an effort held by Stolarczyk, who also kept out Ferry, with more gaps opening up as City pushed more players forward.
Meanwhile, Wright and Gray both volleyed over and Jake Wakeling should have converted when Wright headed Flynn's free-kick across goal, but missed the target as City's hopes of a second-half comeback faded away.
Major moment
Leicester had a golden opportunity to go in front after Admiral Muskwe's equaliser, but neither Ben Nelson nor Callum Wright could find a way past Latham, who stood tall. Southampton were soon back ahead and established a comfortable lead that was ultimately untroubled by Demarai Gray's second-half effort.
Where do we stand?
The Foxes remain ninth in the Premier League 2 table, on 12 points from their opening 10 games, while Southampton are 12th.
Coming up…
Next up, City's Development Squad travel to face Arsenal Under-23s for a Premier League 2 Division 1 clash at Meadow Park on Friday 18 December (7pm GMT kick-off).
The details…
City: Stolarczyk, Leathers (O'Connor 45'), Wakely, Nelson (Russ 66'), Flynn, Hulme, Suengchitthawon, Wright (c), Gray, Reghba (Wakeling 45'), Muskwe
Subs not used: Odunze, McAteer
Goals: Muskwe 20', Gray 49'
Photos: Isabelle Field | Southampton FC