Sri Lanka's bowlers have dominated the second session on day two to loosen Australia's firm grip on the Boxing Day Test in Melbourne.
The hosts, who were 238 for three at lunch, walked off for tea on 330 for six after three wickets fell for just four runs in mid-afternoon.
Shortly after reaching his 22nd Test century, Michael Clarke (106) was caught at slip by Mahela Jayawardene off the the bowling of Shaminda Eranga.
Moments later, Watson's 198-ball and 83-run innings came to an end when his awkward hook shot found the grateful hands of Thilan Samaraweera, who held on to give Dhammika Prasad his second wicket of the Test.
Prasad then claimed his third wicket, as Matthew Wade (1) was caught in the deep by Eranga.
Australia lead by 174 runs.
