Watson, a former assistant manager with Glasgow Rangers, Birmingham and the Scottish national team, is the first addition to manager Chris Kiwomya's new-look backroom team ahead of the 2013/14 season.
The 53-year-old told the club's official website: "Having spoken with Chris and (chief executive) Jim Rodwell, I know that they've got a love and a passion for the club.
"I want to have that love and passion and I'm sure I will, but the one thing they will get from us is hard work and a desire to do well.
"I hope to impact some of the experience I've gathered along the way and take the boys forward so that they can challenge next year."
Former midfielder Watson arrives at Meadow Lane with a strong reputation in the game, having worked alongside Alex McLeish to secure two SPL titles with Rangers and League Cup success with Birmingham.