The 18-year-old actress has signed a two-year contract with the French fashion house, replacing 'Atonement' and 'Pirates of the Caribbean' star Knightley, whose contract with Coco Mademoiselle runs out this summer.
Knightley will be given a new role at Chanel when Watson takes over.
Watson has been associated with the Chanel brand for some time, and they have been dressing her for film premieres and parties over recent months.
It is understood that Warner Bros, which makes the 'Harry Potter' films, has approved the deal.
Watson landed the part of Hermione Granger in JK Rowling's Harry Potter movies when she was nine years old. She has starred in all five movies so far and has signed up for the rest of the series.
Watson also signed up to top modelling agency Storm in an attempt to move into other areas of show business.
Last month, it was reported that Audrey Tautou, star of 'Amelie' and 'The Da Vinci Code', has been signed up to appear in the next Chanel No 5 perfume ad, due to air in 2009.
Tautou replaces Nicole Kidman as the front-woman for Chanel No 5, which has a history of high-profile, expensive advertising campaigns.