Arsenal manager Arsene Wenger says striker Danny Welbeck was not fit enough to play the full game against Watford.
The Englishman scored one and went close to restoring parity for the Gunners as Watford caused a major upset at the Emirates.
It's Arsenal's first defeat in the FA Cup in 756 days.
They face Barcelona next in the Champions League with the Spanish giants starting with a 2-0 lead.
"Our fantastic run has come to an end on a day where we felt that our performance deserved a win," Wenger is quoted as saying BBC Sport.
"Credit to Watford, they created few chances but took them all. It's sad because we gave everything.
"The players don't miss on purpose. You have to be realistic.
"Of course on the first goal, we made a mistake. It was not possible medically to have started Welbeck.
"We did not make our possession in the final third count but we have shown that we can respond to disappointment and it's difficult to understand how we didn't score at the end. It was a typical cup game against a battling team.
"It is very difficult against Barcelona, but we have to see it as a challenge and try to make the impossible possible."