Watts delivers an exceptionally studied performance in the new biopic Diana, which premiered in London's Leicester Square on Thursday.
British-born Watts looked suitably regal on the red carpet in a floor-length white gown and diamonds while greeting and waving at fans.
The film charts the last two years of the princess's life and her romance with Pakistani heart surgeon Hasnat Khan.
"In the beginning, I just thought how do you possibly take on the most famous woman of our time, when everybody feels they know her so well," Watts told a press conference at a hotel in Mayfair, not far from Diana's former Kensington Palace home.
"When you play real life characters there's always an extra sense of pressure because of the responsibility to tell the story in the most truthful and accurate way.
"And certainly in the case of Princess Diana there's no one as well known as her to date, or as much documented."
But Watts, who has twice been nominated for a Best Actress Academy Award, said she could not turn down the opportunity (or the challenge) in an acting world dominated by strong male leads.
"How often do we stumble across such fascinating characters? They're quite hard to find as a woman."
At its heart, the film is the story of two people trying to make a relationship work in very difficult circumstances.
Lost star Naveen Andrews, who plays Khan, said: "One of the characters is very well known. But they are two human beings. It's a very intimate simple love story."
The resulting film is a mixture of some of the most heavily documented events in recent history and a romance that happened entirely behind closed doors.
Watts said the effort to replicate Diana's appearance and mannerisms was most intense during the recreation of the famous 1995 interview between Diana and the BBC's Martin Bashir.
This was the conversation that led to Diana's divorce from Prince Charles.
"I know how much everyone remembers that and I wanted to be as exact as possible," said Watts, who wore a prosthetic nose during filming.
Diana's life has been exhaustively dissected by the memoir industry. Yet the relationship between her and Khan has remained conspicuously under-fictionalised.
"Someone was going to tell this story eventually," said Watts.
Khan fiercely avoided the media during their courtship and after her death.
True to form, he declined to participate in the making of the film. His reticence is a major plot device in the biopic, with the media intensity around Diana driving a wedge between the couple.
Khan was recently quoted in the UK media saying that the film was "based on gossip".
During the scenes that took place between Diana and Khan, Watts said: "Liberties had to be taken and poetic licence. Actors bring nuance to it and, because it's not a documentary, I think it was ok to do that."
The film's producer Robert Bernstein said the romance was a seminal time for Diana and formed the foundation her humanitarian landmine eradication work.
Bernstein said the film's ambition was to reassess this part of Diana's life, which had been forgotten against the tragedy of her death in Paris in 1997.
"The events of her death and the continuing discussion of what might or might not have happened in Paris have overshadowed the extraordinary achievements of her life," he said.
