The Hornets took the lead on 39 minutes and could have doubled it soon after. Sarr it was with his fourth of the season, touching home at the far post from Sema's low cross from the left after Capoue, Gray and Jeremy Ngakia had all combined to release the Swede into space.
Just over two minutes later, Deeney should have doubled Watford's money but he totally mis-hit his volley from an inviting Femenía centre. Once again, Gray was well-placed to profit from the loose change but scooped a harder chance than earlier over the target.
City started and ended the half on the front foot; Max Aarons' third-minute run and tame shot and a Dowell 20-yard blast well over just before the break brought an enthralling first 45 minutes to a close.
Watford squeezed forward with intent from the restart - and put the league leaders firmly on the back foot.
Cleverley saw a 53rd-minute shot blocked behind, Sarr couldn't quite find Gray after pouncing on a slack Oliver Skipp cross-field pass and City keeper Michael McGovern had to beat away a fizzing cross from the Senegalese winger - who was named Sky Sports' 'Man of the Match'.