The Hornets looked to be on course to complete a home and away league double against their local rivals when Marlon King deftly lobbed Marlon Beresford to score his 20th goal of the season.
However, the Hatters offered a more potent attacking threat after the break and deserved to get back on terms, although Watford's defending was poor in letting Ahmet Brkovic steel in unmarked at the far post to level following a long throw.
It took some time for what is normally a full-bodied encounter to come to life and it was the visitors who had the first decent chance when Warren Feeney dragged a shot wide of the far post.
A Steve Robinson drive then looked to be goalbound before it was blocked behind by Jay DeMerit, but it was Watford who scored with their first real chance following an intricate build-up.
Gavin Mahon won a header in midfield, which found Ashley Young and he cleverly clipped the ball between two defenders and King got goal side of his marker and lifted his attempt over the advancing Beresford from the left side of the penalty area.
That goal sparked a late first-half flurry of activity and Luton nearly equalised in bizzare circumstances when Ben Foster's attempted clearance cannoned off Carlos Edwards and back towards goal, but the Watford keeper was able to retrieve the situation.
At the other end Beresford had to tip a stinging King drive over before Watford almost doubled their lead when Chris Eagles spun in the six-yard box following a corner, but his shot on the turn was deflected narrowly wide.
However, Luton started to get forward in increasing numbers after the break, with tricky winger Edwards becoming a growing influence, and it took a fine save from Foster to prevent the visitors equalising from Enoch Showunmi's shot.
Luton continued to be in the ascendancy and it was no real surprise when they did equalise, with Brkovic creeping in unmarked after the home defence failed to deal with a long throw.
But that setback spurred the Hornets back into life and they twice went close to scoring another 2-1 win over their rivals in the closing stages.
First Malky Mackay thought he'd scored following a Young free-kick but the goal was ruled out for offside, and then King showed great individual skill to break into the left side of the penalty area and open up a clear sight of goal before unleashing a right-footed drive which Beresford did very well to push away.