"We have been watching Ben for some time, and believe he has the maturity to step back to the highest level and make an impression." Bruce added.
"He's a midfielder who scores goals. He's got quick feet, plenty of power and is a terrific prospect."
Watson, who made his Palace debut aged 17 and has since scored 20 goals in 189 senior appearances, was in the final year of his contract at Selhurst Park.
Wigan's transfer kitty was boosted when Palacios joined Spurs for �14m last week.
Bruce has also seen Emile Heskey leave for Aston Villa in a �3.5m deal, while Wigan and Boro have traded strikers with Mido moving to the JJB Stadium on loan and Marlon King going in the opposite direction, also on loan.
"I want to thank everyone at Palace, and all the supporters," Watson told Wigan's website.
"They have been great to me but this is a terrific opportunity for me to play in the top flight again and I just felt the time was right for a move for me.
"It's great to be back in the Premier League - Steve Bruce is the big pull here, it's a great time to be joining the club and I'm joining a team who are really flying."
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