Tommy Mooney celebrated being handed the Blues captaincy by scoring twice against his former club, with Darren Purse's strike seemingly making the points safe.
But Watford fought back and a goal from Jermaine Pennant and a late own goal by Michael Johnson ensured a nervous end for Blues.
Bruce was far from happy with his side's late lapses.
He said: "We were in total command and then we made two sloppy defensive mistakes to allow Watford back into the game.
"It was a good win overall and there were several pleasing factors in the game.
"Tommy Mooney took his two goals well but he should have gone away with the match ball as he wasted a fine chance to complete his hat-trick.
"Young Darren Carter is maturing very well and gave another impressive performance, while Stern John is a Premier League player on this performance and he is going to be a big asset to Birmingham City."