The Reds boss admitted “we lost our minds” after Nathan Ake picked goalkeeper Adam Bogdan’s pocket for the opening goal at Vicarage Road.
Klopp claimed left-back Ake fouled Bogdan for the first goal, but accepted Liverpool “made bigger faults” as Odion Ighalo’s brace condemned the visitors to a four-game winless streak.
The German boss admitted it may have been a mistake to leave Christian Benteke on the bench in north London, but downplayed rumours the Belgium striker could join Chelsea in January.
“We lost our minds after the first goal, we lost our compact formation after the first goal, we didn’t play easy when we should have,” said Klopp.
“The pitch isn’t the best one, but it’s possible to play if you play easy football, you have to use the wind, not play against the wind.
“That’s what Watford did with the second goal.
“We made bigger faults than the ref today.
“He (Bogdan) had both hands on the ball, so it’s a foul. I think that’s the situation, but that’s what happens – mistakes, faults, refs, players, that can happen, that’s football, the reaction has to be better.
“I would say hopefully it’s the most disappointing moment in my whole Liverpool FC life.
“We don’t feel good today of course. We came here to do something really different from what you saw.
“Between what we wanted to do and what everybody could see, there’s a big gap.
“I know how strong this team can be and it’s my job to help them show it much more often than we have.
“It’s not that bad. Today was bad.
“The result is very bad, but I’m really disappointed about the reaction on the first goal because things like this can happen.”
Liverpool were rendered toothless in attack by Klopp’s decision to field Roberto Firmino as a false nine.
Ighalo and Troy Deeney’s deadly double act in Watford‘s 4-4-2 exacerbated Liverpool’s absent cutting edge as the visitors failed to fire.
Divock Origi replaced the injured Martin Skrtel in a total formation re-jig just before half-time, but not even adding a focal point could alter the outcome.
Klopp conceded that with hindsight he may have selected a different starting line-up, but in the same breath defended his right to rotate his squad.
“That’s the next problem. If you lose the games everyone is allowed to ask why this player didn’t play, when they wouldn’t after you win,” said Klopp, when quizzed on why Benteke was on the bench.
“So okay maybe it was not the best decision, I don’t know. We will never find out.
“But for today I decide first for Christian, then for Divock, then for Christian. It’s up to the players to change this.”
Chelsea are reported to be targeting a January swoop for Benteke, who only joined Liverpool from Aston Villa in July, but Klopp attempted to dismiss such talk.
“If there’s the same probability in all the other transfer rumours I’ve heard since I’ve been here, then I’m pretty cool,” said Klopp.
“All I’ve read until now was nil per cent and I haven’t heard about this.”
Watford boss Quique Sanchez Flores hailed defender Ake for his shrewd move that led to the first goal.
“The impression I have now is that the ball was live,” said Flores, denying accusations of a foul on Liverpool keeper Bogdan.
“Ake was very clever, because he was in the right position to claim the ball.
“He’s always ready for everything and focused on the play.”
Watch Klopp’s full post-match press conference: