Each entry on [[Special:Watchlist]] has "(diff | hist) . ." links, much like those on [[Special:Recentchanges]]. If these work like the ones on 'recentchanges', presumably they show a 'diff' to the edit one version prior, not to a 'lastread' version.
Watchlist is a special case as the user is logged in and a user-specific lastread pointer exists for every watchlisted page. Presumably we want to see the difference from the last-read version in one click, not just the difference from "one version ago"? It's possible to get this manually by clicking 'hist', going to the last revision without "updated since my last visit" and doing a comparison with the current revision, but this is a roundabout way of doing what should be a rather common task.