Mr Watson, who sits on the Culture, Media and Sport Select Committee, described the letter written by Clive Goodman, the News of the World's former royal correspondent, to News International executives as "explosive".
The letter, written in 2007 shortly after Goodman was released from prison following his prosecution for intercepting voicemails belonging to members of the royal househould, claims phone hacking was widespread at the paper.
Goodman's letter claimed phone hacking was "widely discussed" at editorial conferences until Andy Coulson, the former editor, banned explicit references to the illegal practice. The letter was sent to Les Hinton, the executive chairman of News International, but no action was taken.
"If the letter and the facts contained within Clive Goodman's letter are true then it is a damning revelation," the Labour MP said.
