Watt, who becomes the third player to arrive on loan at Hillsborough this week, will stay with the Owls until January 16 and will go straight into the squad for Saturday’s home game with Leyton Orient.
The 20-year-old, a product of the Arsenal academy, can play wide midfield or as a central striker.
Watt has had two loan spells at Leeds United, playing six times during the 2009/10 season when the Elland Road side gained promotion back to the npower Championship before making a further 22 appearances for them last season.
The former England U-19 international signed his first professional contract with Arsenal in July 2008 and made his debut for the Gunners in September 2009.