After the early loss of David Warner (five), Watson added 99 for the second wicket with Mike Hussey.
Hussey was unbeaten on 45 with Cameron White gaining valuable time in the middle with 21 not out off 13 balls.
Earlier, Xavier Doherty claimed a career-best 3-20 after being recalled for his first game of the tournament. The left-arm spinner replaced medium-pacer Dan Christian in Australia's side.
Doherty opened the bowling and removed Richard Levi (0), Jacques Kallis (six) and JP Duminy (30) while Watson chipped in with the wickets of Hashim Amla (17) and AB De Villiers (21).
The Proteas were 5-86 but recovered thanks to a 60-run stand between Farhaan Behardien (31 not out) and Robin Peterson (32 not out).
Watson praised Doherty's ability to offer a double threat by keeping the runs down and also taking key wickets.
"It's a very exciting thing for our squad, knowing that these wickets are most probably only going to become more and more (favourable for) spin," Watson said.
South Africa are still alive in the tournament - just - and Watson said he was shocked they continued to struggle to win big events.
"South Africa, every ICC tournament we go into, they've got an unbelievably strong side," Watson said.
"They've just got an amazing amount of talent.
"We knew we were going to have to be at our best to beat South Africa and it's certainly very satisfying.
"I'm not exactly sure why they can't seem to really perform at the big events over the last 10 or 15 years because the quality of players they have, they should really be dominating, I think anyway."
Watson could offer little insight into his amazing form in the tournament.
"Things are just falling my way at the moment I suppose," he said.
- AAP