Watson's side are currently in second place in Heineken Cup's Pool 4 as they prepare for back-to-back games against Ulster in Round's 3 and 4 of Europe's Premier club competition.
"This has been one of the most difficult decisions I've ever had to make. I love everything about Bath - the City, the people, and, most importantly, the Club," said Watson.
I've enjoyed my time here immensely, but I feel that the opportunity to go back to my home city and to the club that I first played professional rugby for is the chance of a lifetime and one that I can't miss, both for myself and my family.
I would like to thank everyone at the Club for making my time here so enjoyable, and I would also like to say a big thank you to the Club's loyal supporters for all their support during the last two seasons."
Head Coach, Steve Meehan, added "Of course we are sad to see Luke leave, he has been a very inspirational member of the squad for us, both on and off the field, but we respect his decision."