As the examples in Laurel's answer suggest, the relevant phrase in the context of food (or other) craving is not simply "watered up" but "watered up for." Several fairly early instances of "watered up for" in Google Books search results make the connection to "mouth watering" explicit.
From Mildred Taylor, Let the Circle Be Unbroken (1991):
Uncle Hammer put an arm around Big Ma. "Mama, now I know y'all done had breakfast a long time ago and dinner's still a good couple of hours away, but I tell you what my mouth's really watered up for, and that's some of them fine biscuits of yours, some oil sausages, and some clabber milk and some good ole cane syrup. Think I could bother you for some?"
From Catherine Hart, Irresistible (1994) [snippet view]:
Jade gave an inelegant snort. "Come on, Lizette," she told her friend."It won't do ye any good to get yer mouth all watered up for that one. He's a preacher with a wagon full o' orphans. B'sides that, he don't cotton to trollops, and he doesn't want his wee charges exposed to us."
And from Rachel Vogelsang, Racheltracks (1999):
After this generous soul, and flushed with the first rewards of success, we decided to try for four hundred lire so we could buy milk and make biscuits. We thought of pancakes, for I have an old jar of maple syrup, but we had no eggs. Flour, baking powder and salt we did have so our mouths watered up for homemade biscuits.
Google Book doesn't report any matches for the expression from earlier than 1991. Nevertheless, the expression seems to be at least a hundred years old, to judge from this instance from J.D. Aldredge, The Romance of Growing a Boy in Texas: Autobiographical Sketches of His Early Life as a Boy, volume 1 (1923), uncovered in a Hathitrust search:
It was about the first of July, and the "water was fine", but we were enjoying the anticipation of that melon "feast" more than the water.
Our mouths were "watered up" for its red juicy? meat. But we were to have some other experiences first. For we looked up over the embankment of the "creek" and up the hill, and "behold"! if there didn't appear, my brother Dawson.
Aldredge was the pastor of Central Baptist Church in Jacksonville, Texas—a small town (in 1923) in East Texas about equidistant from Dallas and Shreveport, Louisiana.
Of the other examples noted in this answer. Taylor's is set in Mississippi and Vogelsang's is in Italy although the narrator says that her mother lives in Georgia. Hart's book appears to be about a pioneer journey west from Richmond, Virginia,although it is unclear where the character who uses the expression is from. These various examples point to usage across the U.S. South, which would be consistent with its having some currency in Oklahoma as well.
