Whites boss Simon Grayson was clearly impressed with the youngster's abilities and has now brought him to Elland Road.
Watt made his Gunners' first-team debut earlier this season and capped a memorable night by scoring in a 2-0 win over West Brom.
Grayson is delighted to have landed the youngster and believes he will add much-needed competition to places in his squad.
"Sanchez is a good, young prospect who Arsenal think highly of," Grayson told the club's official website.
"He can play either wide left or as a striker and he brings extra competition for places at an important stage of the season."
Watt is the second loanee is join this week following the addition of Neill Collins while Shane Lowry is expected to re-join on loan from Aston Villa.