It led to a massive outpouring of angst by Gunners fans who have since paraded banners demanding that Wenger goes.
But Wenger admitted being disappointed that Iwobi, a youngster Arsenal had have nurtured since he was seven, has opted to play for Nigeria, the country of his birth, instead of England.
And Wenger said: “He was great today and I think he is England’s loss.”
So England’s loss floated over a cross for Sanchez to see his header palmed out by Watford keeper Heurelho Gomes but was alert to fire home the rebound.
Arsenal scored their second in the 38th minute when Sanchez returned the favour and supplied the pass for Iwobi to turn home.
Arsenal, having scored just six goals in their last eight home games in all competitions despite averaging 25 shots for each goal, again showed their ability to go forward, often slowly at times as they showboated.
But when in decent areas they showed they can also be lethal. This showed again in the 49th minute when Sanchez worked one-twos with team-mates and then saw his cross pushed out to Hector Bellerin whose shot was deflected in off Ben Watson.
Arsenal continued to dominate and finished in style, Ozil whipping a 45-yard crossfield pass that substitute Joel Campbell crossed for fellow sub Theo Walcott to score in the 90th minute.
Flores said: “We are not happy. I would like to think we are not in semi-final thoughts.
“We need to stay positive in the league and anyone who thinks differently will be reminded.”
And he added: “We made mistakes in this match. I made mistakes by selecting players but we must get over this.”