The Algerian scored a fine second half goal to add to Leroy Sane’s first half opener to put the Blues seemingly in control at 2-0 up.
But a late reply from Watford’s Abdelouye Doucoure sparked a tense finale but City held firm to claim the win and move five points clear at the top from Liverpool who play at Burnley on Wednesday night.
And Mahrez, who delivered a man of the match display at Vicarage Road, hailed a display that demonstrated City’s silk and steel in equally impressive measure.
"At the end they pushed but we handled the situation very well,” said Mahrez.
“The most important thing is to go back with the three points.
"We knew once we scored the first it opens up the game, we had more space. When it was 2-0 we had chances to kill the game and we didn't.
“That’s why when they scored it was difficult. But we won a lot of challenges and go back with the three points.”
City skipper Vincent Kompany, who returned to the starting line-up as one of six changes made by Pep Guardiola from the side that beat Bournemouth 3-1 on Saturday, added: "It was a good old Premier League game, as soon as they scored long balls are going to start coming, they are a team that are extremely physical up front.
“Credit to us for staying strong and winning some key challenges in the end.
"I don't think we ever lose focus. Maybe Watford being at home became more brave. We had chances to make it 3-0 and when it doesn’t happen anything can happen.
“We managed the game pretty well. Okay, the last ten minutes was a battle but you can't win every game playing fantasy football."