Prince Harry, 30, has not commented.
Aussie glossy, Women's Day quoted a breathless unnamed insider as saying that the fourth-in-line to the throne is "smitten".
The magazine claimed Harry, 30, asked out Watson after hearing she had broken up with previous boyfriend Matthew Janney in December last year.
It wrote that Watson met with the prince with a group of 12 friends and they have been meeting up in secret since.
The "insider" apparently told the magazine: "Harry didn't want her to feel like she was put on the spot."
"A party also shows he's fun and not stuffy.
"He's smitten - and it's more than Emma's looks."
The rumour was met with a predictable flood of Harry Potter jokes. One Twitter wag said: "Emma Watson is dating Prince Harry! Despite JK Rowling's best efforts, Hermione is finally hooking up with Harry!"
Another said: "I hope Prince Harry and Emma Watson last because if they have a son, it will be the half-blood prince."
Prince Harry broke up with Cressida Bonas in April last year after a two-year on-off relationship ended amicably.
Watson - who played Hermione in the Harry Potter series - broke up with Oxford University rugby player Matthew Janney in December.
A Clarence House spokeswoman said: "Prince Harry's private life is private. We would not confirm or deny that."
- nzherald.co.nz, Daily Mail
