Raheem Sterling's first competitive goal for City since his move from Liverpool set up the win early in the second half, before Fernandinho added a second with a fierce drive to end the newly-promoted visitors' unbeaten league start.
Manuel Pellegrini's side are three points clear at the top of the table after winning their first four league matches of the season without conceding a goal.
The run of 10 victories, stretching back to April, beat a record set in 1912.
They were patient in breaking down a dogged but limited Watford side, and by the end of the match were showing the attacking verve which has made them the early favourites to win the title.
Meanwhile, Chelsea manager Jose Mourinho suffered only his second Premier League defeat at Stamford Bridge as Crystal Palace clinched a shock 2-1 win over the spluttering champions on Saturday.
It was the latest setback for Mourinho's side, winners only once in their first four matches and already languishing eight points behind leaders Manchester City.
"Palace gave us a very difficult game but the result should be a draw, which would still be bad for us," Mourinho said,
"We created lots of chances but we had a couple of players who were not in the game."
Just seconds after clearing a Gary Cahill header off the line, Mali forward Bakary Sako struck at the other end, sweeping high into the net from Yannick Bolasie's cross to give Palace a 65th minute lead.
Colombia's Radamel Falcao looked to have rescued a point for Chelsea when the on-loan Monaco striker headed in a Pedro Rodriguez cross for his first goal for the Blues in the 79th minute.
However, parity was short-lived as defender Joel Ward headed home from Sako's cross in the 81st minute to give second placed Palace their first win at the Bridge since 1982.
Liverpool were beaten for the first time this season as West Ham's 3-0 victory gave the east Londoners their first league triumph at Anfield since 1963.
In the third minute, Martin Skrtel's poor headed clearance fell at the feet of Aaron Cresswell and his low cross was prodded in by Manuel Lanzini, a 22-year-old Argentine midfielder on loan from Al Jazira.
Slaven Bilic's team doubled their lead in the 29th minute when Mark Noble side-footed home after Reds defender Dejan Lovren carelessly allowed Lanzini to seize possession.
"The first goal is a cheap goal and that gave West Ham motivation and fight. The second was a mistake, which can happen," Reds boss Brendan Rodgers said.
Arsenal clinched their second league win of the season as Fabricio Coloccini's own goal gifted the Gunners a scrappy 1-0 success at 10-man Newcastle.
The turning point came in the 16th minute when referee Andre Marriner sent off Aleksandar Mitrovic after the Newcastle striker needlessly stamped on Francis Coquelin's ankle as he stretched in a failed attempt to reach a loose ball.
Wenger's team eventually took advantage of their numerical superiority in the 52nd minute when Alex Oxlade-Chamberlain's low drive beat goalkeeper Tim Krul via a deflection off Coloccini.
Leicester left it late to rescue a 1-1 draw at Bournemouth thanks to Jamie Vardy's 86th minute penalty after the hosts went in front through striker Callum Wilson's acrobatic overhead kick.
Sunderland remain without a league win despite a battling 2-2 at Aston Villa.
West Bromwich Albion won 1-0 at nine-man Stoke, who had Ibrahim Afellay and Charlie Adam sent off, as Venezuela striker Salomon Rondon scored his first goal since his £12 million club record move from Zenit St Petersburg.
In Saturdayʼs late game, Tottenham's 0-0 draw against Everton at White Hart Lane left the hosts still waiting for their first win of the season.
That stalemate also meant there have been only seven wins by home teams in 38 Premier League fixtures this season.
Whilst on Sunday, Manchester United manager Louis van Gaal blamed a five-minute lapse in concentration for his side's 2-1 defeat at Swansea City.
Protecting an unbeaten record, United took a 48th-minute lead through Juan Mata at the Liberty Stadium, only for goals in quick succession from Andre Ayew and Bafetimbi Gomis to give Swansea a third successive win over their opponents.
Swansea's goals arrived shortly after Garry Monk had switched his formation to a 4-4-2 with a midfield diamond, moving Ayew up front alongside Gomis, and Van Gaal said his players had not reacted to it quickly enough.
"The opponent changed their shape. They had started with a 4-2-3-1 and after 1-0, they changed their shape and then we couldn't cope with that," said the Dutchman, who was presiding over his 50th United game.
The result left Swansea a point above United in fourth place in the Premier League table, four points shy of early leaders Manchester City.
In the day's early game, Dusan Tadic scored twice as Southampton won 3-0 at home to 10-man Norwich City to register a first win of the campaign at the fourth attempt.
Steven Whittaker was sent off for Norwich in the 31st minute after receiving quick-fire yellow cards for preventing Matt Targett from taking a quick throw-in and hauling Tadic back on the halfway line.
Man of the match Sadio Mane crossed for Graziano Pelle to sweep Southampton ahead in first-half stoppage time before teeing up the first of Tadic's two goals in the 64th minute.
Tadic struck again three minutes later, following up after Pelle's header was parried by Norwich goalkeeper John Ruddy.
"It was a very positive result," said Southampton manager Ronald Koeman.