The former shipwright and club owner, who represents the Pallion ward, defeated former Labour boss Councillor Bob Symonds in a leadership challenge earlier this month.
And last night he was officially voted in as the new council leader after serving two years as deputy.
Speaking after the meeting, Councillor Watson said he was looking forward to the challenges ahead in moving Sunderland forward into the future and in strengthening the Labour party on Wearside.
"Obviously for Labour in Sunderland these are challenging times," he said.
"I have never experienced more difficult times as a Labour councillor.
"But we see them as a challenge and an opportunity, and although the results have turned out the way they have, we control two thirds on the council – just about, and we won more than half the seats at the local election."
Coun Watson said there was "nothing to be depressed about" and his group would continue to push on with improving the city and build on the successes of the past.
"We look forward to the challenges ahead," he said.
Councillor Florence Anderson was also confirmed as the first woman to hold the position of deputy leader of Sunderland City Council.
The step up has come late in the political career of the Hetton representative, who has served as a cabinet member and committee chairman in her three decades as a councillor.
Council leader Paul Watson said he was "very proud" to see the appointment of the city's first female deputy leader.
"I'm very excited about learning from Florence. She's extremely knowledgeable and a big asset to the city," he said.
"There can be few local authorities that have such a senior woman in such a position."
Coun Anderson said she had never had any previous political ambition and hadn't given her age and gender much thought before deciding to take on the position.
"I've got my bus pass and we'll leave it at that," she said.
"Actually, the first letter of congratulations I received, which was very touching, was from Alan Patchett (Director of Age Concern Sunderland).
"But that was just coincidence of course. I used to work for Age Concern as an organiser."
Coun Anderson said when she was first elected it was unusual for a woman to become a councillor, but now there was a good number of female members and it was nice to see women coming forward.
Coun Anderson will serve in the front ranks of the Labour Group at the same time as her colleague, long-standing Councillor Mary Smith, serves as mayor.
She said: "It's the era of the Golden Girls. I was surprised to find out Mary was born in 1935.
"At least there's someone on the council that's older than me."




Tories' mayor challenge

The ceremonial proceedings ended on a sour note last night after city Tories challenged the proposed deputy mayor.
Conservative leader Councillor Lee Martin called for the appointment of an opposition member to be made deputy mayor, putting forward Tory Councillor Peter Wood.
He said there had not been a non-Labour Mayor of Sunderland in his lifetime and that a figurehead from outside the ruling group would need to command the support and respect of all sides.
But the move was condemned as "gratuitous" and "insidious" by council leader Paul Watson.
Coun Martin, seconded by colleague Councillor Anthony Morrisey, said Coun Wood had served as a councillor in each of the past four decades and had a wealth of experience to offer.
Councillor Watson said he was disappointed at the way the challenge had been made.
Coun Martin said although the annual meeting was seen as a ceremonial one, it was still a forum where important business had to be dealt with.
Labour's nomination, Houghton councillor Dennis Richardson, was voted in as deputy mayor by 46 votes to 23.