The British No 3 was aiming to stay in contention for her fourth WTA title but lost 5-7 6-3 7-6 (7-5) against the French eighth seed after two hours and 35 minutes.
Watson, world No 107, broke her opponent twice in the first set to take the initiative but saw her own serve broken three times in the second as Parmentier levelled up the contest.
The 26-year-old, playing in her first elite level semi-final since Hobart in January, did not face a single break point in the deciding set but was edged out by the world No 69 in the tiebreak.
Parmentier, who ended a decade-long wait for a WTA title in Istanbul in April, will face American qualifier Jessica Pegula in the final after the world No 227 defeated compatriot Sofia Kenin 4-6 6-2 6-4.
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