Watson has been in prison since 1999 for the murders of Olivia Hope and Ben Smart, who disappeared in the Marlborough Sounds on New Year's Day 1998.
He unsuccessfully appealed to the Court of Appeal in 2000 and lost a subsequent application for leave to appeal to the Privy Council.
Watson first applied for the Royal prerogative of mercy in November 2008, and was ultimately declined by the Governor-General in July 2013.
In 2017, Watson made another application, on the basis that the DNA evidence linking two hairs removed from a blanket seized from Watson's boat with Hope was unreliable.
Former High Court judge Sir Graham Panckhurst was instructed to conduct a review of Watson's second application, the material considered by McDonald and her conclusions, and provide a comprehensive report.
"After thoroughly considering Sir Graham's advice and the ministry's report, I advised Her Excellency to refer Watson's convictions back to the Court of Appeal for further consideration. The Governor-General accepted my advice, and granted Watson's application," Little said.
An Order in Council to implement the Governor-General's decision will now be prepared.
The case will be heard by the Court as a further appeal.
"As the matter will shortly come before the courts, I will not be making any further comment," Little said.
