Watson was born in Islington, London. Her father, Richard Watson, was an architect, and her mother, Katharine (Venables), was an English teacher at St David's Girls' School, West London. She was brought up as an Anglican. Watson has described her childhood self as a "Nice middle class English girl ... I'd love to say I was a rebellious teenager but I wasn't".
Watson was educated at St James Independent Schools, in west London, which she has described as 'progressive'. She attended the University of Bristol, where she obtained a BA (1988, English). Following university, she trained at the Drama Studio London. She later received an MA (2003, honorary) from Bristol University.
Watson's career began on the stage. Her theatre credits include The Children's Hour (at the Royal National Theatre), Three Sisters, Much Ado About Nothing and The Lady from the Sea. Watson has also worked with the Royal Shakespeare Company in A Jovial Crew, The Taming of the Shrew, All's Well That Ends Well and The Changeling. In 2002, she took time off from cinema to play two roles in Sam Mendes' repertory productions of Uncle Vanya and Twelfth Night, first at Mendes' Donmar Warehouse in London and later at the Brooklyn Academy of Music. Her performance was widely acclaimed on both sides of the Atlantic and garnered her an Olivier Award nomination for Uncle Vanya.
Watson was virtually unknown until director Lars von Trier chose her to star in his controversial Breaking the Waves (1996) after Helena Bonham Carter dropped out "at the very last minute." Watson's performance as Bess McNeill won her the Los Angeles, London and New York Critics' Circle Awards, the US National Society of Film Critics' Award for Best Actress, and ultimately an Oscar nomination.
Watson came to public notice again in another controversial role, as cellist Jacqueline du Pré in Hilary and Jackie, for which she learned to play the cello in three months, and received another Oscar nomination. She also played a leading role in Cradle Will Rock, a story of a theatre show in the 1930s, directed by Tim Robbins. Though she won the title role of Frank McCourt's mother in the adaptation of his acclaimed memoir, Angela's Ashes, the film underperformed. In 2001, she appeared alongside John Turturro in The Luzhin Defence and in Robert Altman's ensemble piece Gosford Park.
The following year, she starred as Reba McClane in the adaptation of Thomas Harris's The Silence of the Lambs prequel, Red Dragon, as the romantic interest of Adam Sandler in Paul Thomas Anderson's Punch-Drunk Love and in the sci-fi action thriller Equilibrium alongside Christian Bale.
In 2004, Watson received a Golden Globe nomination for her role as Peter Sellers's first wife, Anne Howe, in the HBO film The Life and Death of Peter Sellers. 2005 saw Watson starring in four films: Wah-Wah, Richard E. Grant's autobiographical directorial debut; Separate Lies, directed by Gosford Park writer Julian Fellowes; Tim Burton's animated film Corpse Bride, alongside Johnny Depp and Helena Bonham Carter; and John Hillcoat's Australian-set "western", The Proposition.
In 2006, she took a supporting role in Miss Potter, a biographical film of children's author Beatrix Potter from Babe director Chris Noonan, with Ewan McGregor and Renée Zellweger, and also in an adaptation of Thea Beckman's children's novel Crusade in Jeans. In 2007, she appeared in The Water Horse: Legend of the Deep, an adaptation of the Dick King-Smith children's novel about the origin of the Loch Ness Monster.
In 2008, Watson starred with Julia Roberts and Carrie-Anne Moss in Fireflies in the Garden, the Lifetime Television movie The Memory Keeper's Daughter (based on the novel with the same name), and in screenwriter Charlie Kaufman's directorial debut, Synecdoche, New York. In 2009 she appeared in the film Cold Souls, from first-time director Sophie Barthes, and Within the Whirlwind, a biographical film of Russian poet and Gulag survivor Evgenia Ginzburg from The Luzhin Defence director Marleen Gorris. Watson considers Ginzburg to be her best recent role; however, the film was not picked up for distribution.
In 2010, she starred in Oranges and Sunshine, a film recounting the true story of children sent into abusive care homes in Australia, directed by Jim Loach, and also the following year (2011) in War Horse, an adaptation of Michael Morpurgo's prizewinning novel, directed by Steven Spielberg. In 2011, she played Janet Leach in the ITV two-part film Appropriate Adult, about serial killer Fred West, for which she won a BAFTA.
In 2014, Watson had supporting roles in The Book Thief, alongside Geoffrey Rush and Sophie Nélisse, and the Oscar-nominated film The Theory of Everything, portraying Jane Wilde, Hawking's mother, alongside Eddie Redmayne and Felicity Jones. In 2015, she had supporting roles in Testament of Youth, alongside Alicia Vikander and Kit Harington, Eduardo Verástegui's Little Boy and A Royal Night Out, in which she portrayed Queen Elizabeth The Queen Mother. She also received rave reviews for her portrayal of Julie Nicholson in the BBC Drama A Song for Jenny, with experts tipping her to win the British Academy Television Award for Best Actress.
Watson was appointed Officer of the Order of the British Empire (OBE) in the 2015 New Year Honours for services to drama.
In 2017, she starred in the BBC mini-series Apple Tree Yard.
In 2007, Mood Indigo, a script written by Watson and her husband, was optioned by Capitol Films. The film is a love story set during the Second World War and concerns a young woman who falls in love with a pilot.
Director Jean-Pierre Jeunet wrote the character Amélie for Watson to play (Amélie was originally named Emily) but she eventually turned the role down due to difficulties speaking French and a desire not to be away from home. The role went on to make an international star of Audrey Tautou. She was also the first choice to play Elizabeth I in Shekhar Kapur's film Elizabeth, the role that won Cate Blanchett an Academy Award nomination.
Although she has never appeared in any of the Harry Potter films, she is frequently confused with Emma Watson, the actress who plays Hermione Granger in the series due to closeness in name. She has stated that she does not correct anyone who makes that mistake, as she is "quite flattered that people think I'm 21".
Watson is a committed supporter of the children's charity the NSPCC. In 2004, she was inducted into the society's hall of fame for spearheading the successful campaign to appoint a Children's Commissioner for England. Receiving her award in the crowded House of Commons, she actively spoke out against the possibility that the Children's Commissioner become a figurehead with little real power. She is also one of the patrons of the London children's charity Scene & Heard.
Watson married Jack Waters, whom she had met at the Royal Shakespeare Company in 1995. Their daughter, Juliet, was born in autumn 2005, and their son Dylan in 2009. They live in Greenwich, London. Watson's mother fell ill with encephalitis shortly before filming commenced on Oranges and Sunshine. Watson returned home to Britain to attend to her, but she had died five minutes before she arrived in London.School for Mothers and The Mistake (double-bill of one-act plays), White Bear Theatre, London, 1991All's Well That Ends Well (Royal Shakespeare Company, Swan Theatre, Stratford-upon-Avon 1992, later Pit Theatre, London, 1993) as MariannaThe Taming of the Shrew (Royal Shakespeare Company, Barbican Theatre, London, 1993) as Mrs. Ruth Banks-EllisThe Changeling (Royal Shakespeare Company, Pit Theatre, 1993)A Jovial Crew (Royal Shakespeare Company, Pit Theatre, 1993) as AmieThe Lady from the Sea (Lyric Hammersmith Theatre, London, 1994) as Hilde WangelThe Children's Hour (Lyttelton Theatre, London, 1994) as Mary TilfordThree Sisters (Out of Joint, 1995)Othello (1996, theatre)Twelfth Night / Uncle Vanya (Donmar Warehouse, 2002 / BAM, 2003)The Wolves of Willoughby Chase (1994, radio)Wuthering Heights (1995, radio series)The Glass Piano (2010, radio drama about Princess Alexandra of Bavaria)