Watford scored three late goals to win Javi Gracia's first home game in charge in an "unforgettable night" for their manager and increase the pressure on Chelsea counterpart Antonio Conte.
The Blues played an hour with 10 men after Tiemoue Bakayoko's red card capped off a dreadful individual 30-minute performance - in which he gifted Watford four chances.
The Hornets - who had only won one of their previous 12 Premier League games - led controversially as Gerard Deulofeu went down easily under keeper Thibaut Courtois' challenge and Troy Deeney scored the penalty.
Chelsea, who brought on Olivier Giroud for a debut in the second half, scored an undeserved equaliser when Eden Hazard curled home brilliantly from 25 yards.
But two minutes later, Daryl Janmaat scored a fantastic goal of his own when he cut in from the right wing, played a one-two with Roberto Pereyra and beat another couple of defenders before scoring with his weaker left foot.
Ghana News Headlines
For today's latest Ghana news, visit Graphic Online headlines page Ghana news headlines.
Deulofeu added another when he ran from halfway before his shot was deflected home by Gary Cahill - and then Pereyra scored a fourth from Abdoulaye Doucoure's through ball.
The Hornets are now six points above the relegation zone.
Gracia, who replaced Marco Silva last month, told BBC Sport: "It was a great victory and a great match. I am very proud of my players today.
"We played a good match, pressed high. The match changed after the sending off but I think we played very well. Chelsea are a very big club, a big team."
It was Chelsea's second consecutive defeat by three goals in the Premier League, following their 3-0 home reverse by Bournemouth.