With the game having to be played at Stadium:MK due to Tottenham's new stadium yet to be completed, there was very little to excite the fans in the first half.
Lucas Moura went close for the hosts, shooting narrowly wide from a tight angle, as Dele Alli couldn't quite reach the effort at the far post, while Serge Aurier did brilliantly at the other end to deny Ken Sema, who had only Paulo Gazzaniga to beat in what was the best of the action.
The second however took little time to get going, with the deadlock broken by Watford just a minute after the restart thanks to Isaac Success, who did well to hold off Aurier before firing past Gazzaniga.
Spurs pushed for an equaliser, which was made difficult when Aurier went off injured with all three substitutes used, although they were rewarded in the final ten minutes, when Christian Kabasele was sent off for a foul on Alli inside the area, who dusted himself down to convert from the spot.
There was further drama when Erik Lamela looked to have won the game for Spurs with his strike just four minutes from time, before Etienne Capoue's deflected effort three minutes later meant that penalties were required.
Gazzaniga proved to be the hero for Spurs, saving from both Capoue and Domingos Quina in the shootout and help the north London side advance to the fourth round.
Key Talking Point
While Tottenham advanced to fourth round, it was a very poor performance from them, who needed moments of quality from regular first teamers in order to reach penalties.
Mauricio Pochettino gave chances to fringe players, making eight changes from the side that won against Brighton, although very few took the opportunity afforded to them, as Spurs laboured for large parts of the encounter at unfamiliar surroundings, yet they managed to dig in make it into the hat for the next round.
Starting XI: Gazzaniga (6); Aurier (6), Alderweireld (6), Sanchez (6), Davies (5); Wanyama (5), Winks (6); Sissoko (5), Alli (8), Lamela (8*); Lucas Moura (6).
Substitutes: Son (6), Dembele (6), Llorente (6)
STAR MAN - Frustrated in the first half, Lamela turned the game for his side in the second, with the Argentine influencing the game much more, and having a hand in both goals.
His cute pass played Alli in for the foul that led to the penalty, while his deft finish for Spurs' second looked to have won them the game, although was denying a match-winning goal thanks to Capoue right at the death.
ANOTHER GOAL AMAZING LAMELA— Enjoy your life (@english4alu) September 26, 2018
LAMELA IS ON FIRE FOR US❤— Mxnsty #SoaRRC (@Mxnsty) September 26, 2018
Glad we made it through in the end vs Watford... Erik Lamela, love that guy, and Gazzaniga with the penalty saves⛔️✋— deni gwasira (@OKTBR14) September 26, 2018
WORST PLAYER - There were plenty of candidates for this unwanted award, as many in white failed to perform, although Wanyama was the worst of a bad bunch.
The Kenyan looked laboured in possession throughout the game, while also giving away numerous fouls as he looked off the pace at Stadium:MK, resulting in him getting the hook after 65 minutes.
Ben Davies and Mousa Sissoko although deserve mentions, as they pushed Wanyama close for the award in what was a poor showing from Mauricio Pochettino's side.
Key Talking Point
While Tottenham made eight changes from the weekend, Watford made ten from their last game, and were perhaps unfortunate that a sending off changed the course of the game.
The Hornets frustrated Spurs for large parts of the contest, and when they looked on the verge of losing the game in normal time, they managed to find a way of staying in the game and taking it to penalties, both ultimately losing, which has been indicative of their strong start to the season so far.
Starting XI: Gomes (6); Navarro (6), Cathcart (6), Mariappa (6), Masina (5); Femina (7), Wilmot (7), Chalobah (6), Quina (7), Sema (6); Success (8).
Substitutes: Hughes (6), Kabasele (3), Capoue (6)
STAR MAN - The Hornets played slightly differently than in their Premier League games, using only one striker, although Isaac Success proved to be a useful outlet as a lone forward.
He showed great strength to hold off Aurier in the build-up to his goal, while his general hold up play gave Javi Gracia's side an outlet, with this performance suggesting he can push for a starting place in the league side in the weeks to come.
Isaac like... "Get off me bro, gonna put this one in!" — dylan nolte (@dylannolte) September 26, 2018
Isaac Success put in one hell of a performance. Best player on the pitch by a mile. Bullied & outpaced their defence. Held it up well, drew fouls, took players on, scored a decent goal. Promising season ahead for him #WatfordFC— Robbie Mullens (@rmullens91) September 26, 2018
WORST PLAYER - Kabasele was on the pitch for no more than three minutes, although the Belgian received his marching orders for a foul on Alli, gifting Spurs the chance of an equaliser with only ten minutes remaining.
His dismissal appeared to be a catalyst for the hosts, who took advantage of the extra space in the Hornets defence with Lamela's goal in what was the briefest of appearances.
Capoue goal went off in the away end. Success was unreal tonight, mom by a mile. Gutted about Kabasele, massively changes Saturday game. Still unbeaten against Spurs this season #WatfordFC— Garry Wolf (@hyena4) September 26, 2018
Both sides return to Premier League action this weekend, with both away from home, as Tottenham travel to Yorkshire to face Huddersfield, while Watford make the much shorter trip to the Emirates when they play Arsenal.