The 63-year-old pharmacist suffered a stroke last month while campaigning for a colleague.
Spokeswoman Patty Schuh says Watson's doctors still expect a full recovery. But he wants to make his health his top concern instead of the demands of leadership.
Watson was elected to the House in 1979 and took a Senate seat in 1983. He became minority leader in 2003.
Both parties will be seeking new leaders. Senate President Emil Jones announced his retirement this fall.
(On the Net: www.ilga.gov)