Watkinson, 20, joined the Mariners in the summer after beginning his career in the Youth set up at AFC Fylde and Blackpool.
On the re-signing, manager Neil Young said: “Owen has done really well since he arrived in July.
"He is one of a number of good young players we have, who is really enjoying his development and football.
"We have a way of working here and it’s great that he will now be with us until May 2023.”
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