The 3-2 loss at the Leckwith Stadium sent the Hornets to the foot of the Group F table, having been top of it only a couple of weeks ago.
In what is a very tight group, Watford now have to win when they visit Suffolk in February to be in with a chance of finishing in the top two and moving into the knockout phase.
Having beaten Bristol City 5-2 at London Colney on Monday, the Hornets rotated their team and only six of that starting XI were in the side tonight.
Cardiff had the luxury of being able to include the former Tottenham forward Kion Etete.
The 23-year-old, who has made more than 30 first-team appearances for the Bluebirds, is making his comeback from a hamstring injury that has ruled him out of the season so far.
The home side had the best of a relatively tame first-half, and Watford struggled to get much possession in the final third.
Cardiff took the lead after just over half an hour and were good value for the 1-0 lead at the break.
The home side doubled their lead within seconds of the restart and although Brazilian defender Keiky Almeida reduced the arrears when he headed home his first goal for Watford, Cardiff restored their two-goal cushion a couple of minutes later.
Getting that third goal so quickly gave the Bluebirds a level of control of the game that they never looked like relinquishing in the last half an hour.
Here’s how the game unfolded:
14 – Sikiru won possession inside the centre circle, nudged right to Keyes and he forced a good save from Dennis with a low 18-yard shot.
21 – Giles carried the ball from his own left-back position all the way to 20 yards from goal, but Ortelli palmed away his shot comfortably.
24 – Cardiff free-kick was headed away but only as far as George, and his volley from the edge of the area was pouched by Ortelli.
32 – Barton did well to chase down a long clearance and, after exchanging passes with Twose, got himself into a good position in the box but was denied by a combination of Eames and Sikiru.
34 – Cardiff 1 (Jefferies) Watford 0
Ortelli had to deal with an awkward lofted back pass and, when his first touch was a bit heavy, Jefferies stole the ball and then finished well, turning to chip over Mullins and into the net.
Half-time: Cardiff 1 Watford 0
46 – Cardiff 2 (Wigley) Watford 0
Gould dispossessed just inside his own half and Cardiff broke three on one. An attempted pass was deflected, Mullins couldn’t cut it out and Wigley clipped the ball over the advancing Ortelli.
50 - Jefferies cut in from the right but his shot with the outside of his boot was straight at Ortelli.
54 – Cardiff 2 Watford 1 (Almeida)
Nabizada teed up Keyes for a shot which Dennis tipped onto the bar. From the resultant corner Almeida drifted away from goal and steered a header into the net.
56 – Cardiff 3 (Barton) Watford 1
Excellent through ball from Perrett and Barton timed his run well to stay onside, progress into the box and then slot the ball under Ortelli.
67 – Wigley stole the ball midway inside the Watford half but, as he sprinted into the box, Ortelli forced him wide and then blocked his attempted shot.
80 – A smart move down the Cardiff right saw Wigley burst to the by-line and his attempt to drive the ball in at the near post was blocked by Ortelli.
83 – Superb footwork from Eames on the right was followed by a perfect cross which found Keyes unmarked in the box, but he headed over the bar.
90+2 – Substitute Lawson holds off Spiers as he powers into the box but Dennis parries his firmly-struck shot.
90+2 – Nabizada clips the ball into the area but Keyes can only glance the ball into the midriff of Dennis.
Full-time - Cardiff 3 Watford 1
Watford: Ortelli; Eames, Almeida, Sikiru, Gould (Stephenson 72), Mullins, Massiah-Edwards (Assiedou 72), Fraser-Grante (Garcia-Ronmero 59), Torres (Lawson 59), Keyes, Nabizada. Unused sub: Browne