City, who had won their last nine Championship games, snatched a point with a dramatic late goal from Danny Drinkwater.
It looked as though top-of-the table Foxes were heading for their first league defeat since they lost at Brighton on December 7, when they went into five minutes of stoppage time trailing 2-1.
Despite plenty of pressure from Leicester in the second half, Watford had held firm with some stubborn defending after taking a 2-0 lead in the first 41 minutes.
Fernando Forestieri netted with a diving header in the ninth minute from Troy Deeney's driven ball across the box with Leicester appealing in vain for an offside decision.
Then Sean Murray rifled a rifled a 25-yard drive into the bottom corner to rock the league leaders four minutes before half-time. But Leicester gained a foothold in the match two minutes later with Matty James scoring his first goal of the season from Ritchie De Laet's low cross.
However, with only a minute of stoppage time left, Watford were on the brink of a shock victory until Drinkwater struck a stunning volley from 20 yards to extend the Foxes unbeaten run to 11 games and stretch their lead at the the top of the table to 11 points.
Leicester boss Pearson said: "We certainly deserved to get something out of the game. It is always difficult when you go two goals down and we were disappointed in the manner in which we conceded them.
"But you have got to give Watford credit. I thought their game plan was thorough and they didn't allow us too much space behind their defenders.
"They defended very deeply and tried to limit the opportunities for us to cause them problems. But, all in all, I don't think anyone could argue that we didn't deserve to get something out of the game because we dominated the vast majority of it.
"They did well to go two goals up but we got something out of the game because we are a good side and we showed real determination to get back into the game.
"To score the first goal just before half-time was very important for us and we then put them under an immense amount of pressure in the second half. The goal which got us the equaliser was a stunning strike and it was a good result to keep our unbeaten run going."
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