Pep Guardiola's side slipped to a shock defeat at Norwich City last weekend but responded in spectacular fashion against the league's bottom side, racing into a five-goal lead inside 18 minutes.
David Silva got it on its way after 52 seconds before a Sergio Aguero penalty and goals from Riyad Mahrez, Bernardo Silva and Nicolas Otamendi put the game out of the sight before the midway point of the first half.
Bernardo Silva grabbed the first top-flight hat-trick of his career with goals in the 48th and 60th minutes before Kevin De Bruyne added an eighth five minutes from time.
The result moves City two points behind Liverpool at the Premier League's summit, although the Reds have a game in hand, while Watford remains rooted to the foot of the table with just two points from its opening six games.
City started in blistering fashion, taking the lead inside the opening minute when David Silva slotted home De Bruyne's wonderful cross from the right.
Ederson denied Gerard Deulofeu moments later before Ben Foster rashly brought down Mahrez in the penalty area, giving Aguero the opportunity to slam home his 100th Premier League goal at Etihad Stadium from the resulting spot-kick.
The third came after just 12 minutes when Mahrez's free-kick from the edge of the area beat Foster courtesy of a significant deflection off Tom Cleverley.
Bernardo Silva added a fourth just three minutes later, stooping to head home a corner from eight yards, while Otamendi made it five in the 18th minute, turning home Aguero's low cross at the back post.
City's intensity dropped a little after that devastating opening, although Aguero came close to registering a hat-trick before the interval, the Argentina international twice denied by the post.
The hosts wasted little time making it six after the restart, Bernardo Silva slotting past a helpless Foster from 10 yards after collecting David Silva's pass.
Aguero twice came close to adding a seventh before Bernardo Silva brought up his hat-trick on the hour mark, prodding home De Bruyne's cross from close range at the back post.
Mahrez then saw a header cannon back off the crossbar before De Bruyne capped a superb individual display with a rising drive from 16 yards that gave a beleaguered Foster no chance.
Both sides are in Carabao Cup action on Wednesday (AEST), with City travelling to Preston North End and Watford hosting Swansea City. Guardiola's side then visits Everton in the Premier League next Sunday (AEST), while the Hornets take on Wolverhampton Wanderers at Molineux on the same day.