The Barnsley-born forward joined the Blues in July 2022 after bursting onto the senior stage in 2019/20 as a 15-year-old with Doncaster Belles and then Sheffield United.
After netting her first senior goal in the same season, Watson scored eight times in 22 Championship matches for the Blades the following year, leading to a permanent transfer to west London.
Watson has also earned regular caps for England at both U17 and U18 level, and received her first call-up to the U19s squad in June 2021 at the age of just 17. She played three times in last summer’s U19s Euros in the Czech Republic.
The 19-year-old said: "I'm excited to get started. The setup here is incredible.
"It’s just been great, and I can’t wait to get involved with the girls because they’ve had a great start to the season."
Head coach Laura Kaminski added: “We’re delighted that Lucy has chosen to take the next step in her development at Crystal Palace.
“Lucy is a young forward of real talent and potential, and her arrival gives us even more options in attack for the season ahead. We look forward to working with her this season.”
Everyone at Palace would like to welcome Lucy to south London, and wish her the very best for her spell with the club.
Tickets for Crystal Palace Women’s next three home games of the Women’s Championship season are now available. Find out more here.