Watson has played 28 games for the Hawks in 2015, scoring eight tries.
“Jimmy has been in outstanding form this season in the championship. He has been very consistent and probably our player of the year,” said Hunslet director of rugby Darren Williams.
“His performances have certainly caught the eye of rival clubs but he’s made a home for himself here, he’s got a great relationship with the supporters and he loves the environment he’s playing in.
“It’s a real coup to retain his services for 2016 and says a lot about his commitment to the club.”