"I was a little bit torn," she reveals in an interview with the UK's Sunday Times.
And a big reason she felt conflicted about playing the much-loved princess, who died in 1997, was because she worried about what Diana's sons, William and Harry would think about the film.
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"I do care deeply about how the princes feel, of course," the 44-year-old admits. "I am a mum of two boys."
But she reveals that she felt uncomfortable when she saw one of Diana's sons in person.
"There was actually quite an eerie moment in London when I did see Prince William in a restaurant, and I got very nervous, because if I caught his eye, I didn't want to interpret a look and think he had a negative feeling about this idea, so I made sure not to look," she says.
The film, due out in October, chronicles the last two years of Diana's life, including her love affair with heart surgeon Dr. Hasnat Khan (Lost's Naveen Andrews) and rebound relationship with Dodi Al Fayed before her death in a car crash in Paris.
"There was something very intriguing about this woman's life," Watts says. "It was extraordinary."