The game brought drama from the very start, with former Clarets man Gray seeing a seemingly goalbound effort blocked by Stephen Ward from six yards out early on.
After just three minutes played, the deadlock was broken through Gray, who connected with Troy Deeney's cross from the right to volley into the back of Burnley's net.
The Clarets, who had played 120 minutes of Europa League football in midweek, fell behind again at the start of the second half as Deeney collected Abdoulaye Doucoure's pass inside the box and swept the ball past Joe Hart.
Watford made sure of all three points in the 51st minute when Matt Lowton's wayward crossfield pass was cut out by Hughes, who took several touches and rifled the ball past Hart from 20 yards out.
Burnley substitute Sam Vokes found the outside of the post on 70 minutes while Ben Mee hooked the ball over the crossbar in time added on from a Gudmundsson delivery, but Watford held on for all three points.
BURNLEY (4-5-1): Hart; Lowton, Tarkowski, Mee, Ward (Taylor 74'); Lennon, Hendrick (Vokes 70'), Cork, Westwood, Gudmundsson; Wood (Barnes 65')
WATFORD (4-4-2): Foster; Janmaat, Kabasele, Cathcart, Holebas; Hughes (Femenia 83'), Capoue, Doucoure, Pereyra, Gray (Sema 68'), Deeney (Success 88')