It came after Watson had made repeated legal requests for rehearings.
His earlier appeal to the Court of Appeal in 2000 was unsuccessful, as was his subsequent application for leave to appeal to the Privy Council.
He then made an application for the Royal prerogative of mercy in November 2008.
That was assessed by Kristy McDonald QC and also ultimately declined by the Governor-General in July 2013, on the advice of the then Minister of Justice.
In 2017, Watson made another application for the Royal prerogative of mercy.
"The primary basis of his application was that the DNA evidence linking two hairs removed from a blanket seized from Mr Watson's boat with Ms Hope was unreliable," the Ministry of Justice said in a statement.
"The application also took issue with a number of matters in Ms McDonald's report."
Former High Court judge Sir Graham Panckhurst QC was instructed to conduct a review of Watson's second application, the material considered by McDonald and her conclusions, and provide a comprehensive report.
"After thoroughly considering Sir Graham's advice and the ministry's report, I advised Her Excellency to refer Mr Watson's convictions back to the Court of Appeal for further consideration," Minister of Justice Andrew Little said.
"The Governor-General accepted my advice, and granted Mr Watson's application."
An Order in Council to implement the Governor-General's decision will now be prepared.
The case will be heard by the Court as a further appeal.
"As the matter will shortly come before the courts, I will not be making any further comment," Little said.
Watson's father Chris said he only heard about his son being able to appeal the case again when he was phoned by NZME-owned radio station Newstalk ZB.
He said he had always had "high hopes" his son would be granted further appeals.
"But then again I've had high hopes before, which haven't really amounted to anything."
Watson said he felt there was a new "climate" in which the public were thinking about the justice system and willing to look back into historic cases to ensure the right outcomes had been achieved.
He said Scott was pleased with news of the appeal.
"We've just got to knuckle down and formulate this appeal," he said.
"We don't know at this stage whether we are confined to a narrow approach or whether we can give them a broad picture of it."
When asked if the 20-year saga had ruined his life, Chris replied he had "tried not to let it".
"I sort of missed my grandchildren growing up because I've been concentrating on this.
"We're just going to have to get busy now."
Pair leave on yacht with mystery man
Smart and Hope had been among 1500 revellers partying at the Furneaux Lodge in the Marlborough Sounds on New Year's Eve 1997.
But as the party wound down in the small hours, there was no room for them to sleep on the Tamarack, a yacht chartered by Hope and her sister, Amelia.
Freeloaders had taken their bunks, and Smart and Hope were anxious to get back to shore and find somewhere to sleep.
So they hopped on board the water taxi driven by Guy Wallace, who had arrived at the Tamarack to drop off Amelia Hope and a friend, Rick Goddard.
After they set off, a single man on Wallace's Naiad inflatable offered Olivia, 17, and Ben, 21, a place to stay on his boat.
Wallace dropped the friends at the yacht with the mystery man.
They were never seen again.
Their disappearance led to one of the biggest police investigations in New Zealand history.
To the police, there was no mystery man. It was Scott Watson.
He offered Olivia and Ben a place on his boat, Blade, killed them, then dumped their bodies at sea.
The jury at his 1999 trial agreed. Appeals rejected, case closed.
Smart's mother Mary Smart told the Herald in 2017 she believed Scott Watson was "innately evil".
"I don't think he should be let out," she said.
But Watson's father Chris Watson has maintained his son's innocence over the past 20 years.
He cited evidence by water taxi driver Wallace that Watson was not the mystery man who offered Smart and Hope a place on his yacht.
Chris Watson also pointed to other questions that have been raised over the reliability of DNA evidence linking Hope to Watson's yacht.
"I don't believe [Scott] has it in him to do that — but I am not going to go down the track of being the emotional parent who is going to back his son no matter what," he told the Herald in 2017.
He said he preferred to focus on the evidence instead.
"I've looked at it and used my intelligence and common sense," he said at the time.
