The club have endured a nightmare start to the National League North season, losing heavily at Warrington and Spennymoor with a 3-1 defeat to Alfreton in-between.
Watson will move upstairs, concentrate fully on his role as a Director at Haig Avenue. The club will appoint a new manager in the next few weeks.
The club has confirmed that player-coach David Morgan and assistant manager Andy Burgess will take temporary charge of first team affairs until a decision is made.
Ian Kyle said, “I would like to thank Liam for the huge contribution he has made as first team manager over many years, however we have both agreed that the time is now right to make a change.
“Looking ahead though, I see this as a massive gain for the board. In recent years, the club has taken positive strides forward in terms of its infrastructure, academy, junior sides and relationships with sponsors, and Liam has been a huge part of that.
“I am extremely happy that he will now be able to put more time and effort into helping Steven Porter and myself in continuing that growth.”
Morgan and Burgess’ first game in interim charge will be Saturday’s home game against Boston United.