Goals from Chris Iwelumo, David Jones and Michael Gray won the points for the visitors, but the Hornets will be kicking themselves for letting at least a point slip through their grasp.
Two of the visitors' goals were down to defensive howlers while, aside from the goals scored by Grzegorz Rasiak and John-Joe O'Toole, Tommy Smith missed a penalty and Rasiak hit the woodwork.
Furthermore, Wolves defender Kevin Foley produced a couple of amazing goal-line clearances to keep out another two certain goals.
The visitors got off to the best possible start after just 42 seconds when a complete misunderstanding between Mat Sadler and Richard Lee allowed Iwelumo to chest the ball into the unguarded net.
But the home side got back on terms after 21 minutes with virtually their first attempt.
A Will Hoskins shot from the right edge of the penalty area was turned towards his own goal by Jason Shackell, keeper Carl Ikeme could only divert the ball onto his left-hand post and Rasiak followed in to net his first Watford goal.
A superb end-to-end move then nearly resulted in a second for Rasiak when his header from a Jon Harley cross beat Ikeme, only to rebound off the crossbar, but instead of falling behind it was the visitors that regained the advantage five minutes before the break.
After Leigh Bromby had been penalised for a foul on Iwelumo around 22 yards from goal, Karl Henry touched the free-kick to Jones, whose left-footed curling attempt beat the dive of Lee at his near post.
But the Hornets were level for a second time within two minutes of the restart. Ikeme seemed to think Smith's superbly-weighted free-kick from the right was going out of play, but the Wolves keeper failed to notice O'Toole sliding in to net his seventh goal in his last ten appearances.
The home side then missed a golden chance to take the lead on the hour when Jones was penalised for a clear push on O'Toole in the area, but the normally dependable Smith blazed horribly over from 12 yards.
And this rollercoaster of a match took another twist on 71 minutes when the visitors were gifted another goal. This time Bromby was the culprit when his slip allowed Michael Kightly a clear run on goal, but instead of going it alone he unselfishly squared for Gray to apply the finish.
But how the scoring didn't end there is a mystery because Foley produced two miraculous goal-line clearances in the space of as many minutes to deny O'Toole and then Jobi McAnuff, while at the other end Adrian Mariappa was also in the right place to stop David Edwards from netting what looked a certain goal.