The Blues will host the Hornets on Tuesday, 24 September with a kick-off of 19:45 (UK).
The match will be sandwiched between two high-profile Premier League clashes.
City take on Arsenal on Sunday 22 September and will be back in action after our Carabao Cup match with a trip to Newcastle United on Saturday 28 September.
The full draw for Round 3 is:
Liverpool v West Ham United
Manchester City v Watford
Arsenal v Bolton Wanderers
Manchester United v Barnsley
Wycombe Wanderers v Aston Villa
Coventry City v Tottenham Hotspur
Walsall v Leicester City
Brentford v Leyton Orient
Blackpool v Sheffield Wednesday
Preston North End v Fulham
Everton v Southampton
Queens Park Rangers v Crystal Palace
Stoke City v Fleetwood Town
Brighton & Hove Albion v Wolverhampton Wanderers
AFC Wimbledon v Newcastle United
Chelsea v Barrow
