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City were labouring to break down the massed ranks of Watford's defence, until Raheem Sterling's controversial 46th minute goal changed everything.
Sterling was initially flagged for offside as his effort looped over goalkeeper Ben Foster, but the decision was overturned by referee Paul Tierney following a close discussion with his assistant referee.
Sterling was in an offside position as he latched onto Sergio Aguero's lay-off from Ilkay Gundogan's pass, but the ball was kicked onto him by defender Daryl Janmaat, and the Dutchman's interference was enough to convince Tierney that Sterling should be ruled onside.
Sterling then went onto to complete a hat-trick as City piled the pressure on second-placed Liverpool, who host Burnley at Anfield tomorrow.
Guardiola wished the balance of the game had not hinged on such a moment, and backed the introduction of VAR in the Premier League next season despite complaints over its use in the Champions League this week.
"If the first goal is offside, I am sorry," said the City manager.
"There should be an easy solution and next season there will be. With VAR, that will not be a problem, it will be fairer.
"At the beginning of the season, Manchester City voted to install VAR. Some clubs did not accept it. Hopefully next season like in other countries in Europe we can install it.
"I am so sorry and I apologise to Javi (Gracia) and to Watford if the first goal is offside, but we were incredible.
"We made an incredible game, we played well in the first-half and had only one shot on target - their goal - against us."
However, Watford manager Gracia was angered by a call which fundamentally altered the course of the game.
"Today, in my opinion, it is clear," he said.
"At the moment Aguero touched the ball Sterling is in an offside position, a clear offside position, maybe two metres.
"After that, he is in an offside position and he has influence as well because he goes to the ball. After that, it is true the defender touches the ball, but he touches it because Sterling is close to him and is going to press him."
Before the break, the champions had struggled to create chances against the massed ranks in defence from Watford, who despite making seven changes, made life very difficult for their hosts.
Goalkeeper Ben Foster had made saves from David Silva and Aguero, but the opening half was one of frustration on the pitch and in the stands as City fans grew restless.
Sterling's first goal broke the shackles and within 13 minutes, he had completed his hat-trick to secure all three points and make it 18 goals in all competitions for City this season.
His second was a tap-in from little more than two yards out after good work from David Silva and Riyad Mahrez and then he grabbed his third when he cut inside his marker and beat Foster with a neat finish.
Guardiola, though, was not gushing in his praise of the England winger.
"The three goals were fantastic but he can do better," he added.
"He didn't help us a lot defensively in the first half and he gave the ball away a lot."
Watford's first shot on target in the 66th minute produced their goal as substitutes Troy Deeney and Gerard Deulofeu each combined with their first touches as the Spaniard turned home the forward's lay-off.
But it was no more than a consolation and City now turn their attention towards the Champions League and the FA Cup this week in their quest for a quadruple of trophies as Premier League matters take a back seat for the next three weeks.
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