Suffering a fourth successive away league defeat for the first time under Wenger, sixth placed Arsenal are seven points behind fourth placed Manchester City in the race to qualify for the Champions League via a top four finish.
Arsenal great Ian Wright said the nature of Arsenal's latest capitulation showed the "dressing room is lost".
"Our attacking players are enjoying themselves more than they ever have this season and are flourishing in possession and scoring goals, so we have everything right at the moment and we just have to keep it up for a little bit longer". "You could sense it had an impact on us after the second goal".
John Cross of The Mirror believes that there is a 95 percent chance that Arsene Wenger will sign a new two-year deal to stay at Arsenal.
Chants including "Arsene Wenger, we want you to go", "We want Wenger out" and "You're not fit to wear the shirt" were clearly audible inside the ground, with Arsenal's players then subjected to verbal abuse as they headed for the team coach.
He said: "People may laugh at that, but if you look at a manager who seems to get the best out of players at the clubs he's worked at [Allardyce is the choice]".
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I think the foreign leaders are picking up the phone and calling him if they have an issue. And China will either decide to help us with North Korea, or they won't.
Insisting that every defeat is a big worry for him, the 67-year-old said that his team need to respond very quickly and not accept the humiliating defeat. I have managed over 1,000 games for Arsenal and we are not used to lose like that. "And of course it is a big worry".
"I'm not in the mood to speak about it", said Wenger. They came here with the hope they'd win the game. "Incredible victory. The boys are full of confidence at the minute".
"We all did and that's not Arsenal at all". The visitors also couldn't handle Palace winger Wilfried Zaha or striker Christian Benteke.
With some big games on the horizon, Arsenal were shocked as goals from Younes Kaboul and Troy Deeney set the Hornets on their way with Alex Iwobi's reply not enough for the hosts.
Arsenal's defending was shambolic early in the second half.
Arsenal's misery was completed when Martinez was adjudged to have tripped Townsend, and Milivojevic converted the penalty.