The north London side had the chance to move to within six points of Premier League leaders Chelsea but Arsenal struggled against the Hornets with Wenger sat in the stands at The Emirates.
Former Tottenham defender Younes Kaboul broke the deadlock in the 10th minute before Watford captain Troy Deeney extended the away side’s lead just three minutes later in north London.
Nigeria international Alex Iwobi halved the deficit in the second half to offer Arsenal hope of a comeback before Spanish striker Lucas Perez hit the underside of the crossbar.
But Walter Mazzarri’s side hung on to inflict upon Arsenal a very damaging defeat in the Premier League title race.
Speaking to BBC Sport after Arsenal’s disappointing 2-1 loss to Watford, Wenger admitted that his players lacked the right approach to get a positive result against the Hornets.
“We knew the solution was going wide but we were not patient enough and wanted to give too many long balls. We did not pass the ball quickly enough and we have to stick to our game, then we are always dangerous,” Wenger said.
“Where does it leave the league? We lost today and we want to respond in the next game. You can only have a chance if you win your games. I knew exactly what we were preparing for but we have to learn from Tuesday night.”
MORE: Man United latest news
MORE: Arsenal latest news
MORE: Chelsea latest news
MORE: Liverpool latest news