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Kasper Schmeichel was left sprawling in the 20th minute as he was beaten by Odion Ighalo's 20th-minute half-volley, but his strike came back off the post. Almen Abdi charged onto the rebound, but Schmeichel recovered to tip the midfielder's follow-up attempt over the bar.
Leicester's best chance of the first half fell the way of Vardy, but the forward couldn't beat Heurelho Gomes, who got down low to push his strike from the edge of the box away to safety.
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Marc Albrighton fired at the Brazilian stopper four minutes into the second half, but the Watford goalkeeper gifted Leicester the lead in the 53rd minute when he allowed N'Golo Kante's toe-poke to squirm through his grasp and into the back of the net.
Vardy saw a shot blocked by Miguel Britos, but the England forward was then felled by Gomes inside the area and he picked himself up to slam the resulting penalty straight down the middle of the goal.
However, Watford were handed a lifeline when substitute Juan Carlos Paredes was brought down by Kante with 15 minutes remaining and captain Troy Deeney kept his composure to beat Schmeichel from the penalty spot.
Riyad Mahrez came close twice in quick succession as Leicester immediately looked to restore their two-goal lead, but the Foxes comfortably saw out the remaining quarter of an hour to move level on points with league leaders Manchester City.body check tags ::