Etienne Capoue side-footed Watford ahead in the 27th minute at a blustery Vicarage Road as the hosts had the better of the first half but Palace responded after the break. Michy Batshuayi punished a defensive lapse to equalise for Roy Hodgson's side just past the hour mark and it was Palace who looked to have the upper hand moving into the closing stages.
But it was Watford who secured a last-four date at Wembley when Gray, who had just replaced Will Hughes, volleyed a 79th-minute winner to send their fans home dreaming of a second FA Cup final appearance after they lost the 1984 showpiece. They had to survive a late scare though when Palace's Aaron Wan-Bissaka drilled a low shot wide after a defensive blunder.
Gray's winner secured a hat-trick of 2-1 wins for Watford over Palace this season after Javi Gracia's team won both Premier League matches by the same margin. (Reporting by Martyn Herman Editing by Christian Radnedge)