Tudgay struck from the edge of the box after 51 seconds and the hosts held on to net a sixth consecutive league win.
Both sides had their chances after that with Marvin Sordell and Lloyd Doyley going close for the visitors.
Nathan Tyson, Rob Earnshaw, Chris Cohen and defender Luke Chambers also had chances for Forest.
But the Reds did not need a clinching second goal and now sit seven points behind leaders QPR with two games in hand.
The game's pivotal moment came when new Forest left-back Paul Konchesky combined with Cohen and Earnshaw and the latter teed up Tudgay who finished in fine style with the outside of his right foot.
Watford responded and home keeper Lee Camp made fine saves from a fierce Sordell strike and an excellent dipping effort from full-back Doyley.
Cohen then hit a snap shot at the other end before Earnshaw curled a free-kick wide as a lively first half came to an end.
The chances dried up a bit after the interval but Earnshaw flashed a shot across the face of goal and Watford's Danny Graham had his first attempt but he could only drill a low shot at Camp after some good work in the box.
Chambers almost nicked a second home goal when he flicked a header wide from a Radoslaw Majewski corner before Forest substitute Nathan Tyson had the final effort of the afternoon when he shot straight at keeper Scott Loach from 20 yards.
The Hornets have now gone four games without a win in all competitions but remain in the hunt for a play-off push themselves.
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