Palace should have led by half-time at Vicarage Road as both Christian Benteke and McArthur were frustrated from fine goalscoring opportunities by impressive saves from home goalkeeper Ben Foster.
Watford made the most of those let-offs by taking a 53rd-minute lead through Roberto Pereyra before Jose Holebas made it 2-0 when his cross found the top corner.
While Wilfried Zaha pulled a goal back for Palace, they were denied an equaliser in stoppage time when Joel Ward was gifted a free, close-range header that he put wide.
McArthur’s chance was perhaps the best of the lot, and he said: “I had an opportunity which I should have scored but (Foster) had a good game but we need to be more clinical in front of goal.
“It’s about us trying to get in position to try and score and we had numerous opportunities but we’ve not taken them and even though the goalkeeper has played well, from our point of view we’ve conceded two cheap goals.
“The first one obviously is a great finish but from us in midfield it’s disappointing to let him get into that position whilst the second one is a bit fortunate to go into the top corner.
“This is the Premier League, it’s tough, and all about fine margins. We could have scored right at the death and we have four points but we need to just keep going and playing well, if we do that we will push up the table.”
Foster has experienced victory in all three matches since his return to Watford, and he told their official website: “We deserved it. it was a good game, scrappy in the first half, but in the second we created a lot of chances.
“We started a bit sluggishly last week (against Burnley) and came out the second half and were a different team again. We probably just need to address the start that we have but I can’t fault the lads, they were absolutely class.
“We came out (for the second half) and looked stronger. We had a tough pre-season and it showed in the second half.”