"Making the decision to step down wasn't easy but it's something I've been thinking about since the Test series against India ended," Watson said in a statement.
"I think it's the right time for a change for both the team and me. I'll be honest and admit I wrestled with the decision for some time, however once I made up my mind, I informed Cricket Australia so the selectors could consider their options for the Ashes given the squads will be announced soon," he added.
"I want to be the best Test player I can be for Australia and think I can do that by stepping down from the vice-captaincy to focus my attention on scoring runs, taking wickets and doing whatever is necessary to help the team achieve success.
"I won't be the vice-captain in title but I think I can still be a leader and strong contributor around the group," he said.
Watson said his captain Michael Clarke, coach Mickey Arthur and Cricket Australia were supportive of his decision to quit the post.