Watkins is one of the current in-form players in the Premier League, having scored two hattricks already in 12 appearances across all competitions.
The 27-year-old joined Aston Villa from Brentford in the summer of 2020 for £28m and has scored 50 goals in 127 games.
Watkins has recently earned a recall to Gareth Southgate's England squad for the upcoming international games.
He has also been nominated for September's Premier League player of the month.
Speaking to Villa's website, Watkins said: "I'm really happy.
"I feel like this is the best place for me to play my football and I've still got a lot to achieve here.
"I feel like I've had a really good connection with the fans since I've come here. From day one they've been really good with me. We've had highs and lows but that’s football.
“You can see the direction of the club and I want to be a part of that."
"We're only getting started. The boss has been here for a year and you've seen the form and progression of players.
"There are other levels we can get to. Hopefully we can push on and get to the Champions League spots — that's the aim."
Boss Unai Emery added: "He is always very demanding, to learn and improve. He is doing that here.
"I have been working with him more or less for one year and today is the same as the first day, our method in the training ground."
