Watson, who recorded wins over fellow Brit Elena Baltacha in the second round and Paula Ormaechea of Argentina in her opening match, saw her progress ended abruptly by the Italian.
Vinci took the opening set with some ruthless returning as the Brit struggled to find a rhythm on serve, and it was always going to be tough battling from behind.
But Watson surged back to take the second set with a crucial break of serve separating the two players as the Edgbaston crowd roared on their player.
Vinci was undeterred, however, and capitalised on superior energy and intensity in the deciding set as Watson faded.
The Brit was only able to record a solitary game in the final set as she was comprehensively beaten by the Italian.
Vinci will next take on Jie Zheng of China, who defeated Andrea Hlavackova of the Czech Republic in their third-round clash.
Elsewhere in the draw Jelena Jankovic progressed after Casey Dellacqua withdrew, while eight seed Ekaterina Makarova moved on with a 2-6 6-1 6-3 victory over Marina Erakovic.
Melanie Oudin routed Elena Vesnina 6-0 6-2, while Irina Falconi was also a straight sets victor, dispatching Urszula Radwanska 7-5 6-3.
13th seed Hsieh Su-Wei advanced to the quarter-finals, while Stephanie Foretz Gacon and Misaki Doi will have to resume their match on Friday after rain intervened with the Japanese leading 6-4 2-2.