Watson was dropped on eight by Jonathan Trott, successfully referred an lbw shout from Stuart Broad on 40 and survived a referral on 43. He hit eight fours in his 80-ball innings.
George Bailey anchored the innings and hit his highest ODI score of 65 off 86 balls with seven boundaries.
Tim Bresnan had the best bowling figures for England with 2-50 while Steven Finn took 1-36 and brilliantly ran out David Hussey for 29, but England was uncharacteristically sloppy in the field, dropping four catches and bowling 25 extras.
Australia won the toss and opted to bat on an excellent wicket, although England captain Alastair Cook said he would have bowled anyway given the choice.
England made one change to the side which beat Australia by 15 runs on Friday in the first ODI of the five-match series. Jade Dernbach replaced James Anderson, who has a groin strain.
Australia made two changes. Mitchell Johnson came in for Pat Cummins, who picked up a side strain at Lord's and misses the rest of the series, while Steve Smith was dropped and replaced by Peter Forrest.
Finn struck an early blow for England when he drew a top edge from David Warner, who was caught at square leg by Ian Bell for 10 on the first ball of the fifth over.
Dernbach then had Watson dropped by Trott at gully in the next over, before a 30-minute rain delay.
When play resumed Forrest tried to glance Broad down the leg side but fell to a one-handed catch from wicketkeeper Craig Kieswetter for 12 in the 15th over.
Watson successfully referred an lbw decision, with replays showing Broad's delivery would have missed the stumps and he was then hit on the pads again by Broad.
This time Watson was given not out and England wasted its referral as the ball hit Watson outside the line of off stump.
Watson continued to live dangerously and was nearly run out three balls later, but he brought up his 50, from 50 balls, at the start of the 20th over with a pull that evaded Bell by inches.
Australia captain Micheal Clarke was out for 10, caught behind off Ravi Bopara (1-16) in the 21st over and Watson finally fell in the 32nd when he misjudged a pull to Graeme Swann and was caught at midwicket by a diving Finn.
The run rate dipped below four an over until Bailey accelerated, reaching his 50 from 72 balls.
Bailey holed out to a delivery from Swann at the end of the 42nd, but Bresnan misjudged his run to deep midwicket and dropped the chance.
David Hussey was then brilliantly run out for 29 by Finn, who only had one stump to aim at before Tim Bresnan took two wickets in three balls.
Bresnan bowled Bailey with the second delivery of the 47th over, then had Matthew Wade caught by Broad for 6 after a misjudged ramp shot.
Brett Lee (20 not out) was dropped by Eoin Morgan off Dernbach on the long-on boundary in the next over, before smashing Bresnan for the only six of the innings.
Morgan then put down a difficult running chance to remove Lee with the final ball of the innings from Dernbach.