"It is such an honour to be able to play this iconic role – Princess Diana was loved across the world and I look forward to rising to the challenge of playing her on screen," telegraph.co.uk quoted Watts as saying.
The film titled "Caught In Flight" will focus on Diana’s relationship with Hasnat Khan, the man she described as "Mr Wonderful". It will be directed by Oliver Hirschbiegel, whose 2004 film, "Downfall", charted the last days of Adolf Hitler.
Watts has replaced actress Jessica Chastain, who was attached to the project last year but later opted out. The shooting of the film begins this year.