Second seed and defending champion Yanina Wickmayer demolished Simona Halep of Romania 6-0 6-2.
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Watson will play Peng, the world number 72, on Thursday for a place in the semi-finals against defending champion Wickmayer or Simona Halep.
Earlier, women's World No. 1 Serena Williams ended the hopes of Romanian qualifier Simona Halep with a routine 6-3 6-0 win in their semifinal.
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Serena and Venus also won their opening doubles match, beating Romania's Sorana Cirstea and Simona Halep 6-3 6-2 to set up a clash with Kerber and Sabine Lisicki.
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The Pole's reward for a 6-7 (10-12) 6-4 6-2 success is a match with Argentine qualifier Paula Ormaechea, who claimed the first WTA Tour level match win of her career by beating 50th-ranked Romanian Simona Halep 6-1 3-6 7-5.
Poland's fourth seed Agnieszka Radwanska was the highest to fall, losing 6-7 6-1 6-2 to Simona Halep of Romania in the second round, but she may have gained some consolation by seeing sister Urszula inflict defeat on 15th seed Ana Ivanovic.
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Twelfth seed Agnieszka Radwanska enjoyed a relatively comfortable passage into the third round with a 6-3 6-4 win over Croatia's Petra Martic, and the Pole will play Simona Halep after the Romanian beat Russia's 24th seed Alisa Kleybanova 6-4 7-6 (7-2).
Her older sibling Venus beat Romania's Simona Halep in the first round for the second tournament in a row, and the 1999 Rome champion will take on Russia's Ekaterina Makarova as she seeks to improve on her second-round defeat on the blue clay last week.
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