Watford came from behind to consign Town to their third defeat of the season, the Hornets running out 2-1 winners at Vicarage Road. Pablo Couñago put the Blues ahead early on but the home side hit back in the second half through John Eustace and John-Joe O'Toole.
The Blues lined up with Moritz Volz making his debut at right-back and with Iván Campo making his first league start in central midfield. Liam Trotter was used on the left of midfield having been left out against Wolves last week. Pablo Couñago and Kevin Lisbie continued their partnership up front.
The Blues were in front in one minute and 53 seconds. Watford keeper Mart Poom cleared the ball straight to Pablo Couñago on the edge of the area and the Spaniard held off a defender to calmly pass the ball into the corner of the net for his first league goal of the season.
Town continued their bright start and in the ninth minute Gareth McAuley hit a shot from a corner which deflected over the bar.
On 16 Walters sent in a dangerous cross from the right which was just beyond the in-rushing Lisbie. Moments later, Iván Campo received a yellow card for a somewhat innocuous foul on halfway.
The Blues should have extended their lead in the 22nd minute when Liam Trotter threaded Lisbie in on goal on the left of the area, but the former Charlton man scuffed the ball wide with Couñago screaming for a pass on the edge of the six-yard area.
Watford's first serious pressure on the Town goal led to a penalty claim after Tamas Priskin took the ball past Wright, went beyond McAuley and appeared to trip over his own feet as he was about to stroke the ball into the empty net. Referee Lee Probert waved away the home side's protests.
The Hornets were starting to get more into the game and on 31 Tommy Smith headed straight at Richard Wright.
Four minutes later, a deep cross from the right was met by Jon Harley, who headed back across Wright and off the post, the ball falling kindly for the Town keeper.
On 37 Eustace was yellow-carded for a foul on Moritz Volz, then in injury time Richard Naylor misjudged a header but Jobi McAnuff lashed well over.
Town had started the better of the side and should have been two goals in front before the home team, who looked decidedly disorganised at the back, had even got going. However, by the end of the half the Hornets were starting to take the game to the Blues and might well have been on terms.
Watford replaced Jordan Parkes with John-Joe O'Toole at the break and continued to improve as the game restarted.
On 46 Priskin's header from a corner was palmed wide by Richard Wright, then McAnuff was booked for a somewhat cynical foul on Moritz Volz.
Town's best moment of the half came in the 55th minute when a flowing move on the counter attack led to Volz playing in Walters, but Poom had come off his line quickly to block.
Two minutes later O'Toole's 57th minute shot deflected wide and from the corner the Hornets got back on terms. Lee Williamson whipped the ball in from the right and John Eustace lost Iván Campo and headed the ball into the net.
The home side almost went in front on 59 when Wright spilled McAnuff's shot but managed to palm the ball out of play ahead of two in-rushing attackers, with no Town defenders to be seen.
Haynes replaced the largely disappointing Lisbie, and Walters moved up front with Couñago.
Walters forced Poom to tip over with a shot from the edge of the box on 67, then soon after flicked a header across the face and wide.
The Blues had an amazing escape in the 72nd minute when Priskin crossed low from the right and McAnuff somehow managed to hit the top of the bar from around two feet out.
Volz was booked for a succession of fouls, prior to Jordan Rhodes replacing Pablo Couñago up front.
As the game moved into the final 10 minutes, Thatcher crossed from the left and Haynes headed over, before Shumulikoski took over from Liam Trotter in the midfield.
Just as it looked as if Town would hold on for a draw, McAnuff struck a shot from the edge of the area which Wright again couldn't hold. Once more it was a Watford man who was first to react, this time O'Toole, who slammed the ball home to give his side a victory.
The Blues showed little in the way of threat in the closing stages and in the end were deserved losers of a match they should have had won inside the first 20 minutes. The game was strangely similar to the Preston defeat on the opening weekend of the season when Town surrendered an early lead and spurned further chances during their spell of dominance.
However, more than anything it was far too much like all too many of last year's away performances. The Blues started brightly but gradually lost their impetus and, once they had conceded the first goal, heads dropped and the side never looked like getting back into it.
In the second half Town never controlled the game and the strikers were forced to chase long balls with nothing coming through a midfield overrun by the greater athleticism of sub O'Toole and his team-mates.
As against Wolves last week, the Blues were very much second best after the break and will have to make a vast improvement if the season really is to be one in which there is a serious promotion challenge.
Town: Wright, Volz, Thatcher, McAuley, Naylor, Campo, Miller, Trotter (Shumulikoski 81), Walters, Lisbie (Haynes 65), Couñago (Rhodes 73). Unused: Supple, Balkestein. Att: 16,345.