Director Oliver Hirschbiegel is scheduled to start shooting "Caught in Flight" in England this year, The Hollywood Reporter said.
The entertainment industry trade newspaper quoted Watts as saying it is "an honor 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."
Hirschbiegel said he is confident Watts will be able to capture "the warmth, humanity and empathy of such a global icon as Princess Diana."
Watts' film credits include "21 Grams," "I Heart Huckabees," "King Kong" and "J. Edgar."