Klopp's side fell apart after a blunder from Reds goalkeeper Adam Bogdan was punished by Watford's Nathan Ake in the third minute at Vicarage Road on Sunday.
Showing little resistance against tenacious opponents, Liverpool conceded a sloppy second goal when Odion Ighalo bullied Martin Skrtel into another mistake in the 15th minute.
Liverpool never threatened a response as Watford wrapped up their first home win over the Reds since 1986 when in-form Ighalo headed home in the closing minutes. It was the heaviest defeat of Klopp's two-month reign and by far the worst performance.
"After Southampton and Manchester City everyone thought 'wow'. That was one part of what we can do. Now everyone saw the complete other side," Klopp said.
"Maybe the truth is somewhere in the middle, but I know how strong this team can be. We don't feel good today of course. We came here to do something really different from what you saw.
Klopp had no qualms about criticising Bogdan for his mistake, but he felt referee Mark Clattenburg could have blown for a foul before Ake scored because he virtually kicked the ball out of the goalkeeper's hands.
"We made bigger faults than the ref but in my opinion he had both hands on the ball so it is a foul," Klopp said.
"Mistakes can happen, that is football, but the reaction has to be better. We lost our minds after the goal. I would say hopefully it's the most disappointing moment in my whole Liverpool FC life."
"That is the next problem. If you lose the games everyone is allowed to ask why didn't you play this or that player," he said. If it is the same probability as all the other transfer rumours Ive read since I've been here then I'd say I'm pretty cool."
While Klopp contemplates how to get Liverpool back on track, Watford manager Quique Sanchez Flores was basking in the glow of his impressive side's most complete performance of a remarkable first half of the season.
"We are playing against amazing players and managers and we are playing the way I want. I'm very happy," he said.
"It's very good for the Premier League what teams like Leicester, Bournemouth and Watford are doing. Every single weekend you don't know what will happen. But it would be a very big mistake to think about anything else other than trying to grow.
Flores also played down speculation that Nigeria forward Ighalo could be lured away from Watford by a bigger club in January.
"I think Ighalo is clever. He will stay with Watford, Why? Because it is something special for him I hope," he said.
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