The Foxes rallied after the break and Paul Gallagher scored twice to level matters at 2-2, but the Hornets` Danny Graham scored the winner in the 85th minute.
Eriksson said: "It's frustrating. It's the same thing we saw two weeks ago in Bristol. We played good football in the second half, but not the first half.
"Watford were fighting better than us first half, but if we concede goals as we did against Bristol and the first two here - even the third was rather easy - then it's difficult to win away.
"We need to go on working, hopefully making less mistakes, and we are lucky that there are a lot of games still to be played and I still think we have the possibility to be rather higher in the table.
"I'm saying that because I feel we are playing football better and better, and I thought we were very good in the second half."
Source: PA
Source: PA