Watertown was founded in 1879 as a rail terminus when the Chicago & Northwestern Railroad reactivated part of a line it had constructed to Lake Kampeska. During the 1880s, the town prospered as a transportation hub after the railroad was extended farther west.

Despite the prominence of rivers and lakes in the area, the city was named after Watertown, New York, the hometown of brothers John E. Kemp and Oscar P. Kemp, two of the city's founders.

Watertown sits on the Big Sioux River and two major lakes: Pelican Lake and Lake Kampeska.

According to an 1888 report in the Watertown Public Opinion, the Lake Kampeska Monster was at least 200 feet long, had a thirty-foot-long fluked tail, and a "crested head as large as a yearling calf." "Opening its awful jaws," one witness said, it "uttered the most unearthly laugh that ever broke on mortal ears." Fortunately, there haven't been any sightings since the 1880s.

Watertown is home to the Redlin Art Center which houses many of the original art works produced by Terry Redlin, one of America's most popular wildlife artists. Born and raised in Watertown, South Dakota, he originally planned to become a forest ranger, but took up painting at the age of 15 when he was disabled in a motorcycle accident.

In 1912, the Watertown City Council agreed to display a collection of pheasants and waterfowl donated by Mr. Frank Bramble. In years following, the Zoo continued to add native and exotic species such as primates, big cats, and hoofstock. Today the Bramble Park Zoo is home to more than 800 animals.

The Goss Opera House in Watertown, South Dakota, has a chilling ghost story to tell. In 1936, a hotel waitress named Maud was burnt alive by her alcoholic son. Guests heard her screaming, "I'm on fire! I'm on fire!" and found her running up and down the hallway. They put the flames out and took her to the hospital, but she died from her injuries. She has since been seen and heard haunting the hallways. The entire third floor was later renovated except for Maud's room, which was preserved as a sign of respect.

Bootleggers took advantage of the city's underground steam heat tunnels during Prohibition--tunnels that still exist today.

The Mellette House was built in 1885 by Arthur Calvin Mellette, last governor of the Dakota Territory and First Governor of South Dakota. The Mellette Memorial Association has restored this home to its former beauty, with the original furnishings, family portraits and heirlooms.

Ghost Town Winery, located in Uptown Watertown, bottles and markets wines named after South Dakota ghost towns such as Appleby, Yahota, Travare, and Grover.