The 22-year-old Academy product is currently on loan with League One promotion hopefuls Wigan Athletic, where he has made 26 appearances in all competitions so far this term.
Born in Alnwick, the former Ponteland High School pupil progressed through the ranks to make his Premier League debut against Liverpool in July 2020.
An England international at under-19 level, Watts' loan with the Latics, added to previous spells with Stevenage, Mansfield and Plymouth, has already seen him pass the 100 career appearances mark.
And head coach Eddie Howe has been sufficiently impressed to offer him a new deal as the youngster looks to continue his development.
Watts said: "I'm absolutely delighted. I've been at the club since I was eight so I am buzzing to get a new contract.
"All my family are thrilled and I can't wait to be working with the new manager next season."
Read an interview with Kell Watts here