After going down 2-0, City stormed back in a comeback that was orchestrated by the Argentinian maestro.
Watford led 2-0 at halftime courtesy of goals from Fernando Forestieri and Troy Deeney, but City rallied after the break as Aguero's treble was complimented by Aleksandar Kolarov's fortuitous strike to spare Manuel Pellegrini's side's blushes.
City opted not to risk Alvaro Negredo with the Spaniard nursing a shoulder injury so Edin Dzeko started, while Watford defender Lloyd Doyley replaced the suspended Fitz Hall.
Watford dealt well with City's attacking force and deservedly went in front after 21 minutes, when Forestieri outpaced Martin Demichelis before calmly slotting under Costel Pantilimon in the City goal.
City responded and almost equalized when Yaya Toure released Sergio Aguero, who swiveled in the box and saw his shot deflected wide.
But things went from bad to worse for the home side on the half-hour mark as Watford doubled its lead.
Demichelis played a poor pass out of defense and Sean Murray found Ikechi Anya, who picked out Deeney, and the striker kept his composure to sidefoot home from six yards.
A slick move on the stroke of halftime created the opportunity for a third goal, but Daniel Pudil's fierce effort found the side netting.
City showed much more energy and drive after the break and Dzeko fired straight at Jonathan Bond from 10 yards when slightly off balance.
The deficit was reduced after 58 minutes, when Kolarov's teasing cross was met by a sliding Dzeko and, though his effort was saved, Aguero was on hand to convert the rebound.
Roared on by an expectant home crowd, City poured forward with Dzeko again testing Bond, then substitute Stevan Jovetic had an effort closed down with 20 minutes remaining.
Watford's resistance finally broke in the 78th minute. Navas drove forward and picked out Dzeko, who in turn laid into the path of Aguero, and the striker curled the ball into the top corner from the right-hand side.
The comeback was complete in the 85th minute when Kolarov's hopeful 30-yard strike squirmed under the despairing Bond.
And there was still time for a fourth goal as Aguero completed his hat trick with a back-post header.