The bassist played on songs including Roll Away The Stone and the group's best known hit All The Young Dudes, written and produced by David Bowie.
He died on Sunday of cancer, said Peter Purnell from record label Angel Air Records.
He said Watts was a "highly intelligent and witty man who throughout his adult life was both an immensely likeable character and an enigma".
His death comes almost exactly a year after that of drummer Dale Griffin.
Born in Yardley, Birmingham, Watts attended Ross Grammar School where he met Griffin. They played in local bands such as The Anchors, Wild Dogs Hellhounds and The Silence. The two friends went on to form The Doc Thomas Group with Mick Ralphs and Stan Tippins from The Buddies.
The line-up changed in 1968, when keyboard player Verden Allen joined, and they changed their name to The Shakedown Sound.
Allen posted on Facebook that Watts was a "warm, funny, intelligent, talented and hugely charismatic person" who "always had an entertaining story to tell".
In 1969 the musicians moved to London and came to the attention of record producer Guy Stevens who auditioned Ian Hunter and appointed him as their lead singer instead of Tippins, and Mott the Hoople was formed.
After the group split in 1974, Watts went on to form the bands Mott and British Lions.
He also ran a large retro store in Hereford, selling specialist clothing, unusual antiquities, instruments and rare music and wrote a book, The Man Who Hated Walking, which was published in 2013.
Watts, who lived just outside Ross-on-Wye in Herefordshire, is survived by his sister Jane.
Morgan Fisher, a former Mot the Hoople bandmate, posted a tribute on Facebook to Watts's "bravery, honesty, generosity, open heart and still-devastatingly witty humour during his last days".
Fisher added that "he left this world as a total hero, a samurai".
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Mott the Hoople founding member Pete Overend Watts has died aged 69.