The striker - recalled to Gareth Southgate's England squad this week for the first time in over a year - joined Villa from Brentford in 2020 for a fee of £28 million.
Watkins scored 15 Premier League goals last campaign, helping to propel his club to qualification for this season's Conference League.
He has four goals in seven appearances so far this term, three of which came in Villa's 6-1 hammering of Brighton last weekend.
"It's definitely been a memorable week for me, one I'll never forget," Watkins told Aston Villa's website.
"I'm very grateful. I have a lot of good people around me and there's a lot of good people at the club.
"I'm so happy that a lot of people have been here on this journey with me."
Watkins had been rumoured to be on the radar for a number of Premier League clubs in recent months, with the likes of Arsenal and Manchester United thought to be long-term admirers of the player.
The forward will likely be leading the line for the Villans this weekend as they visit midlands rivals Wolves on Sunday afternoon.
