The Scotland flanker, who won his 25th cap in the extraordinary 38-38 draw with England in the Guinness Six Nations at Twickenham earlier this month, has targeted silverware as he closes in on a decade at the club.
“I love it in Edinburgh. The playing group we’ve got, and are building, is absolutely amazing,” the 27-year-old said.
“We’ve got a great coaching staff and I want to win something with Edinburgh. If that takes two years or ten years, it doesn’t matter.
“This group of players and coaches is going places and I love the direction that the club is moving in.”
Watson joined Edinburgh in 2011 after spending time in the Leicester Tigers academy, and signed his first professional deal in 2014. He made his Scotland debut the following year.
Hailing Watson as “one of the most exciting back-row players in the country”, Edinburgh head coach Richard Cockerill added: “He’s a leader in the changing room and is so often a match-winner on the field.
“We’re looking forward to watching him develop further and hopefully bring success to this city.”
The Capital club have also agreed deals for four new players ahead of the 2018/19 campaign.
Bristol Bears back-row Nick Haining, Southern Kings hooker Mike Willemse, Perpignan’s Fijian wing Eroni Sau and Fiji Sevens captain Kalione Nasoko have all agreed two-year deals with Edinburgh.
Willemse is a former South Africa Under-20 cap, and has played for Super Rugby side Stormers as well as Eastern Province Kings and Golden Lions.
Haining was previously with Jersey Reds before joining Bristol for their promotion push in 2017/18, while Sau - dubbed “The Sledgehammer” - has been plying his trade for French TOP14 side Perpignan since May 2018. Along with Nasoko, he features for the Fiji Sevens side and has contributed 37 tries in 58 games.
The Fijian duo have won Sevens tournaments in Hamilton, Hong Kong, London, Singapore and Vancouver.