The team announced those moves Wednesday and also designated veteran tight end Ed Dickson for return off IR, allowing him to return to practice this week.
Seahawks coach Pete Carroll said Thompson needs surgery for a labrum injury he's been dealing with for a while.
"He's really been toughing it out for a good while," Carroll said. "So we're going to miss him. He's been an integral part of our stuff and a really good teammate. We love the guy and hate that he's not going to get to play, but we've got to fix him up."
Thompson, a fourth-round pick in 2017, made six starts at free safety this season with mixed results and may have been in danger of losing playing time with rookie Marquise Blair's emergence and Quandre Diggs' arrival last week in a trade with Detroit.
Thompson had interceptions in critical moments in Seattle's wins over the Rams and Browns but has had some lapses in coverage that resulted in long completions, including a 50-yarder in the Seahawks' loss to Baltimore that Carroll lamented as a "big mistake."
Thompson missed two games this season with a hamstring injury. Carroll gave a vague responses when asked about Thompson's shoulder never being listed on the team's official injury report even though it's been bothering him for some time, saying: "He's just been, last year or something like that he had something that he was concerned about and this week it just went, so we have to fix him up."
Carroll said Bradley McDougald, who hasn't started the past two games due to back spasms, is "ready to go" and "full speed." He called Diggs a longshot to make his Seattle debut this week because of his hamstring injury he was dealing with in Detroit.
The 31-year-old Watson has made seven starts in nine seasons. He was most recently with the San Francisco 49ers, appearing in four games for them in 2018 and 14 in 2017.
Carroll said Dickson has a chance to play Sunday against Tampa Bay after spending the first eight weeks of the season on IR with a knee injury.