The Shrimps have moved quickly to secure the signature of the 20-year-old, and he will join up with the squad immediately.
Watts made his professional debut back in January 2021 as Southampton saw off Shrewsbury Town in the Emirates FA Cup.
A week later, the midfielder made his Premier League debut, replacing Danny Ings in Southampton's defeat to Arsenal, in turn becoming the 52nd Australian to play in England’s top division.
Watts spent time on loan at League Two side Crawley Town last season, and has also represented Australia at U17s and U23s level.
He also represented his country at the Tokyo Summer Olympics back in 2020, playing in all three of the Olyroos’ Group Stage games.
“I am buzzing to get started,” said Watts.
“I have heard a lot about the cub and I have been down to the ground and I really like what I see.
“I heard about the interest and I spoke to the gaffer, I really like what he had to say, I thought it was an interesting project and now that I am here I cannot wait to get going.
“My time at Crawley Town was frustrating and short, but playing in-front of a crowd has made me really excited of what is to come and I cannot wait to sample more of that.
“Playing in high-pressure games against different cultures on the international stage has really helped my development, in England you play against teams that have very similar approaches, but when you’re playing international football, you get exposed to different styles.
“Fans can expect energy from myself, I like to get forward and make stuff happen for the team, I like to think that I am quite exciting to watch.”
Shrimps boss Derek Adams added: “I am delighted to add Caleb to the squad, his high-energy, attacking style of play will add a different dynamic to our team."