The Gunners squandered a two-goal half-time lead as defensive errors again cost Unai Emery's side, and in the end they were probably lucky to leave Hertfordshire with a point as Watford had 31 shots on goal during the game.
Pierre-Emerick Aubameyang's brace looked to have the visitors cruising only for Sokratis Papastathopoulos to gift possession to Watford inside his own box and allow Tom Cleverley to strike.
David Luiz then tripped substitute Roberto Pereyra to concede a penalty, which the Argentina international coolly tucked away as Watford collected just their second point of the season.
The performance saw Xhaka concede that the Arsenal players were afraid as Watford lay siege to their goal after the interval.
"We were scared in the second half," he told Sky Sports. "We knew they would come at us and push us hard but we have to show more character and not be scared."
Such comments could set alarm bells ringing among the supporters, but Gunners boss Unai Emery saw it differently and refused to criticise his players.
Maybe Xhaka's comments have been taken out of context and reacting to his captain's claim, Emery said that his team should never feel that way on the pitch.
"When we are analysing inside about the mistakes, we prefer to speak about the mistakes collectively," he said. "I have responsibility. I don't want to say it's for one player or another. It's my responsibility and after give them confidence and capacity to get better from our game plan.
"It (feeling scared) might have been individual. You never need to be scared.
The result leaves Arsenal sitting in seventh place in the Premier League table, and are one of five teams currently on eight points.