The British wildcard's 6-7(8), 6-4, 6-2 win over Flavia Pennetta was her first over a member of the Top 20 and secures her a meeting with former Wimbledon champion Petra Kvitova, who defeated Varvara Lepchenko, 6-1, 6-4.
After dropping a tight first set on the tie-break, the writing looked on the wall for Watson. However, she responded superbly, snatching the momentum with a decisive break in the opening game of the second set before cruising through the decider as Pennetta struggled to cope with her relentlessly accurate groundstrokes.
"That is my highest win so far. But I wasn't really looking at it like that," Watson said. "I was looking at, you know, my goals and what I want to achieve. It didn't matter who I was playing today. I just wanted to get to that next round.
"I knew it was going to be tough. I have seen Flavia play a lot, actually. Just on TV - she always seems to be on whenever I've been watching! I knew my game plan and had a good one with my coach and just kept fighting even after a tough first set. Just stuck in there and kept positive."
Britain's other representative in the draw, Johanna Konta, was unable to join Watson in the last eight as she saw victory snatched from her grasp by Camila Giorgi. Eastbourne-resident Konta held match point in the final set before Giorgi hit back to triumph, 1-6, 7-5, 7-5.
"The grass really suits me. I like the fast ball and pace I get from my opponent's shots," Wozniacki said. "I just enjoyed it and I played well out there. I held my composure and I served well. She didn't make it easy for me to finish it off but I'm pleased with how I played."
Daniela Hantuchova's ninth visit to the south coast ended in disappointment as she slipped to a 6-3 6-3 defeat against Lauren Davis, while there were also wins for Angelique Kerber, Ekaterina Makarova and Madison Keys. Kerber's match was particularly dramatic, saving two match points before going on to defeat Alizé Cornet, 7-5, 1-6, 7-6(3).