Mertesacker had given the visitors to Vicarage Road a first-half lead with a header in the Premier League on Saturday.
But Troy Deeney levelled from the penalty spot in the 71st minute before Tom Cleverley scored a dramatic late winner.
While Mertesacker was unsure about the penalty, given against Hector Bellerin for a foul on Richarlison, he lamented Arsenal's inability to respond.
"I'm not sure, I cannot tell [if it was a penalty]. Honestly, it's so quick these actions, it's difficult to judge and the referee made that decision," the German defender told Arsenal's website.
"I think for us it was kind of a wake-up call, but it wasn't loud enough."
The loss was Arsenal's third in eight Premier League games and left them sixth in the table.
Mertesacker said his team were wasteful in possession against Watford.
"I think that's what we lacked, especially in the second half. You know when we got the ball we missed a chance, but we missed as well to play, we missed it completely," he said.
"That's what we did really well in the first half, where we regained possession, kept possession, that was really good.
"In the second half we just wasted the ball and that's obviously not enough.
"If you just protect and you have no chances on the break and you miss one chance to kill the game, then it's difficult in the Premier League to win any game."