City, who face Chelsea at Stamford Bridge on Saturday evening, extended their unbeaten run after Leroy Sane and Mahrez struck either side of half-time at Vicarage Road.
But the champions were given a fright in the concluding stages when Abdoulaye Doucoure bundled over from close range with just five minutes remaining.
Despite facing a nervous end as Watford went in search of what, for most of the match seemed an unlikely point, Pep Guardiola’s side held firm to claim their seventh consecutive league victory.
The City squad will now be given Thursday off ahead of their trip to west London this coming weekend, yet despite their healthy advantage, Mahrez believes Chelsea, Arsenal and Tottenham, as well as their closest rivals, Liverpool, remain in title contention.
“Anyone in the top four can still win the league,” said Mahrez. “Nothing is done and we need to keep working very hard for each other and try to win every game.
“Now we need to focus every three days, and we need to be ready and at our top.
“You are not going to win every game 4-0 or 5-0, and going through these types of games makes you stronger.
“We created more chances and tried to kill the game but in football when you are 2-0 up and the opposition scores, the crowd get behind them and it’s difficult, so we were very happy to win and get the three points.”
City took a one-goal advantage into the interval following a dominant opening period. It could have been more, but for the heroics of Watford goalkeeper Ben Foster, who pulled off a string of fine saves.
Never an easy game against a top team. But we showed strong fight until the final whistle! Thank you for the support 🐝 pic.twitter.com/BxYzZuXUlT— Gerard Deulofeu (@gerardeulofeu) 5 December 2018
The Hornets have now lost four of their last five matches, but Foster believes they will take confidence from their fightback against the league leaders.
“I am proud of the team,” Foster said. “When you play against City it is always very easy to go a couple down, and then heads can drop and the floodgates can open.
“But we kept going, kept plugging away, we got the goal and then towards the end they are clinging on for it. There are not many teams that can say they ran Man City that close this season.
“That is tribute to our lads, and we will take that into the next few games, now knowing we can compete with these sorts of teams at this level.
“Everton on Monday is a tough one, but we will take a lot of confidence with us.”
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