It meant Watford boss Roy Hodgson saw the final blow inflicted by one of his former clubs, as the Hornets missed out on the win they required to keep survival as a long-shot hope.
Wilfried Zaha's 31st-minute penalty, after a handball by Hassane Kamara, put Palace in front and proved to be the match-winning goal. Kamara was also sent off midway through the second half after receiving a second yellow card.
Even if Watford had won at Selhurst Park, it would have required further victories in its final three games against Everton, Leicester City and Chelsea, while hoping Leeds United or Burnley lost each of their remaining fixtures.
Hodgson, who left Palace in May 2021 after four seasons with the Eagles, was appointed Watford manager in January and inherited a side sitting 19th in the Premier League.
After earning promotion with Xisco at the helm, Watford fired the Spanish coach in October and brought in Claudio Ranieri, the Italian who led Leicester City to a shock title in the 2015-2016 season.
Ranieri showed little sign of repeating past glories, and Hodgson also found the going tough, with Watford remaining 19th and now condemned to a swift return to the Championship, along with already-doomed Norwich City.
This will be Watford's fourth relegation from the Premier League, making it the sixth different side to be relegated from the competition on four or more occasions, after Norwich (six), West Bromwich Albion (five), Palace, Middlesbrough and Sunderland (all four).
Hodgson, who will leave Watford at the end of the season, this week said he would not be putting his name forward for Premier League jobs in the future at the age of 74.
Watford has now won just one of its past 30 league matches against London sides (D7 L22), with the exception being a 1-0 home win over Millwall in April 2021. It has lost 15 Premier League matches in a row against teams from the capital, the longest losing run against London teams in top-flight history.