The Gateshead boss resigned his position this morning and steps down to the National League North.
York have only been without a boss since parting company with Sam Collins on Saturday night.
The quickly identified their man and have moved to bring him to Bootham Crescent.
Watson has taken the Heed into play-off contention in the National League and brings with him assistant manager Micky Cummins.
City's board of directors released a statement reading: “We are delighted to welcome Steve Watson to the club as first team manager along with his assistant Micky Cummins.
“The board conducted a series of interviews with a number of candidates but Steve impressed with his considerable experience as a player and coach, his knowledge of the game at all levels, and his vision for the club.
“He has demonstrated an ability to be successful on a limited budget at Gateshead and is prepared to step down from a higher league to strive for success at York City Football Club.
“The board will now be fully supportive of Steve's aims and ambitions and wish both men every success in their task.”