Match ends, Watford 4, Chelsea 1.
Watford scored three late goals to make manager Javi Gracia's first home game an "unforgettable night" and increase the pressure on his Chelsea counterpart Antonio Conte.
The Blues played an hour with 10 men after Tiemoue Bakayoko's red card capped a dreadful individual 30-minute performance - in which he gifted Watford four chances.
The Hornets - who had won only one of their previous 12 Premier League games - led controversially as Gerard Deulofeu went down easily under keeper Thibaut Courtois' challenge and Troy Deeney scored the penalty.
Chelsea, who brought on Olivier Giroud for a debut in the second half, scored an undeserved equaliser when Eden Hazard curled home brilliantly from 25 yards.
But, two minutes later, Daryl Janmaat scored a fantastic goal of his own when he cut in from the right wing, played a one-two with Roberto Pereyra and beat another couple of defenders before scoring with his weaker left foot.
Deulofeu added another when he ran from halfway before his shot was deflected home by Gary Cahill - and Pereyra scored a fourth from Abdoulaye Doucoure's through ball.
The Hornets are now six points above the relegation zone.
Gracia, who replaced Marco Silva last month, told BBC Sport: "It was a great victory and a great match. I am very proud of my players.
"We played a good match, pressed high. The match changed after the sending-off but I think we played very well. Chelsea are a very big club, a big team."
It was Chelsea's second consecutive defeat by three goals in the Premier League, following their 3-0 home reverse against Bournemouth.
Wonderful Watford fully deserve win
Watford had earned just six points from 12 games since late November, with Silva losing his job and being replaced by Gracia - who lost to Southampton in the FA Cup and drew 0-0 at Stoke in his opening two games, both away from home.
They were excellent from the start against the defending champions and merited all three points.
They had plenty of chances to score before and after Deeney's opener, which came when Deulofeu was clipped by Courtois and threw himself to the ground. Gracia's side should have been out of sight before Hazard's strike looked set to rescue a late point.
As well as the four gifts from Bakayoko, Deeney missed a sitter from eight yards, and Richarlison, Doucoure and Jose Holebas all forced saves from Courtois.
For a team in such bad form, many may have expected a collapse after Hazard's equaliser against the run of play - but it galvanised the hosts for a phenomenal final eight minutes.
Janmaat restored their lead brilliantly, before the lively Deulofeu - on loan from Barcelona - scored a fine individual goal moments later.
Pereyra's goal was also impressive, running onto Doucoure's through ball before taking Cesar Azpilicueta out of play with his first touch and lashing past Courtois.
Is time running out for Conte?
Before the game, Conte took the unusual step of asking the club to release a statement backing him - following their heavy home loss to Bournemouth.
If it was not coming before the Watford game, it is highly unlikely to come after it.
Having won the Premier League in the Italian's first season in charge, Chelsea are fourth and battling for the final Champions League place this term. They are one point above fifth-placed Tottenham.
Their fans were annoyed with referee Mike Dean for what they felt was a harsh Bakayoko second booking and a perceived dive for the penalty - but Chelsea were very poor and deserved nothing from the match.
The visitors were shambolic at the back at stages - and only had three shots on target, all in the final 10 minutes. Cesc Fabregas, who replaced Willian following Bakayoko's red card, forced a save just before Hazard's beautiful goal from outside of the box.
With Alvaro Morata still out with a back injury, Conte decided to start with Hazard as a false nine.
Former Arsenal striker Giroud came on in the 64th minute and he only had two chances - one blocked and one saved by Orestis Karnezis in injury time with the game long gone.
Bakayoko's half-hour to forget
Bakayoko's opening half-hour was so bad Chelsea fans could have been excused for thinking they would be no worse off following his red card.
Having been responsible for one of Bournemouth's goals, he followed that up with an even worse performance.
Early on, the France international passed the ball to Deulofeu, who overran the ball back to Courtois.
Bakayoko then headed the ball straight at Doucoure's chest and the Watford player shot wide from the edge of the box.
The £40m summer signing from Monaco was then dispossessed before the ball broke to Deulofeu, who shot into the side netting - and Richarlison had a shot blocked by Cahill after Bakayoko had given the ball away.
Both his yellow cards came after he lost the ball too.
First of all he gave the ball to Etienne Capoue and then pulled him down in the 25th minute. And five minutes later he miscontrolled the ball to Richarlison and fouled the Brazilian while stretching to try to win it back.
In all, he had 28 touches, losing the ball seven times, and failing with four of his attempted 12 passes.
Man of the match - Gerard Deulofeu (Watford)
Match stats - Chelsea's worst double result since 1995
- Chelsea have now lost more league games this season (six) than they did in the entire 2016-17 campaign (five).
- The Blues have lost consecutive Premier League games by a three-goal margin for the first time since October 1995 (4-1 v Manchester United, 3-0 v Blackburn).
- Watford earned their first win in any competition against Chelsea in 14 attempts (D3 L10) since a 1-0 win in September 1999.
- Gracia is the first Watford manager to win his first home Premier League game in charge of the club.
- Hazard scored his first Premier League goal against Watford - Huddersfield are the only side in this season's competition he has faced but not scored against.
- All three of Deeney's Premier League goals this season have been penalties against 'big six' sides (Arsenal, Manchester United and Chelsea).
- Three players have now received red cards for fouls on Richarlison this season - Davinson Sanchez, Jonathan Hogg and Bakayoko - more than any other player in the division.
- Chelsea have been shown seven red cards this season, two more than any other Premier League side.
- Pereyra is the fourth player to both score and assist a Premier League goal from the bench this season, after Morata against Burnley, Anthony Martial for Manchester United against West Ham and Andre Ayew of Swansea against Huddersfield.
Watford visit West Ham in the league on Saturday (15:00 GMT kick-off), while Chelsea play again next Monday - at home against West Brom (20:00).
- 5PrödlBooked at 50mins
- 7DeulofeuSubstituted forCarrilloat 89'minutes
- 11RicharlisonBooked at 45minsSubstituted forPereyraat 65'minutes
- 9DeeneySubstituted forGrayat 90+3'minutes
- 30David LuizBooked at 58mins
- 14BakayokoBooked at 30mins
- 22WillianSubstituted forFàbregasat 34'minutesBooked at 62mins
- 11PedroSubstituted forGiroudat 64'minutes
- 10E Hazard
- Mike Dean
- Shots on Target
Second Half ends, Watford 4, Chelsea 1.
Corner, Chelsea. Conceded by Orestis Karnezis.
Attempt saved. Olivier Giroud (Chelsea) left footed shot from the centre of the box is saved in the bottom left corner. Assisted by Eden Hazard with a headed pass.
Davide Zappacosta (Chelsea) wins a free kick on the left wing.
Foul by Abdoulaye Doucouré (Watford).
Offside, Chelsea. Cesc Fàbregas tries a through ball, but Eden Hazard is caught offside.
Substitution, Watford. Andre Gray replaces Troy Deeney.
Goal! Watford 4, Chelsea 1. Roberto Pereyra (Watford) right footed shot from the right side of the box to the bottom left corner. Assisted by Abdoulaye Doucouré.
Substitution, Watford. André Carrillo replaces Gerard Deulofeu.
Goal! Watford 3, Chelsea 1. Gerard Deulofeu (Watford) left footed shot from the centre of the box to the bottom left corner. Assisted by Abdoulaye Doucouré following a fast break.
Attempt blocked. Davide Zappacosta (Chelsea) right footed shot from outside the box is blocked. Assisted by Olivier Giroud.
Eden Hazard (Chelsea) wins a free kick in the attacking half.
Foul by Gerard Deulofeu (Watford).
Goal! Watford 2, Chelsea 1. Daryl Janmaat (Watford) left footed shot from the centre of the box to the bottom right corner. Assisted by Roberto Pereyra.
Attempt missed. Gerard Deulofeu (Watford) right footed shot from the left side of the box misses to the right. Assisted by Etienne Capoue with a through ball following a fast break.
Goal! Watford 1, Chelsea 1. Eden Hazard (Chelsea) right footed shot from outside the box to the bottom right corner.
Attempt saved. Cesc Fàbregas (Chelsea) right footed shot from the centre of the box is saved in the bottom right corner. Assisted by Eden Hazard.
Attempt saved. Roberto Pereyra (Watford) right footed shot from outside the box is saved in the bottom right corner. Assisted by Daryl Janmaat.
Attempt saved. José Holebas (Watford) left footed shot from outside the box is saved in the top centre of the goal. Assisted by Gerard Deulofeu.