What is the Watcher in the Water? Gandalf - the person most likely to know - has no idea; his only contribution is that 'the arms were all guided by one purpose' (obviously), and that he thinks it came from under the mountains. Surely we can do better than that!
A Giant Spider
Gandalf's description of the Watcher as 'older and fouler... than Orcs' suggests some form of primordial terror, of which the only one we know by name is Ungoliant. Like the Watcher, she possessed many legs (though admittedly, not the twenty seen on the Watcher). Many spiders can survive underwater for significant lengths of time - could the Watcher be one of Ungoliant's spawn, sister to Shelob, acclimated to its watery home after thousands of years?
Eh... probably not, in all honesty. But it seemed like an interesting idea.
The larval/adult form of the Fell Beasts
The other (nameless) creatures from the beginning of time are the fell beasts (Tolkien never capitalises it) ridden by the Nazgul. Could it be that, like mosquitos, they begin their life as a water-bound monstrosity, before shaking off the tentacled larval form and taking to the air? Or, alternately, could they shed their wings and settle into a sedentary lifestyle, feeding on passers-by?
Again, it seems unlikely - but at least the metamorphosis would explain the differences in appearance.
Or, more accurately, the nature-spirit of the Sirannon, a relative of Goldberry (the river-spirit of the Withywindle). We know that nature-spirits, or incarnations of landforms, can become malevolent - Caradhras - and even prehensile - Old Man Willow. It may be that, when the Sirannon became dammed, forming a massive stagnant lake, its spirit too became corrupted. Having previously used a humanoid or other form - or maybe even no corporeal form at all - it could have taken on a new aspect: a many-tentacled creature, 'pale-green and luminous and wet'.
The main problem with this theory is time. We know the Sirannon was free-flowing when Gandalf passed through Moria, sometime between 2850 and 2950. We know it was blocked by 2990, when Balin's Colony encountered the Watcher. Is less than 150 years long enough for a nature spirit to turn to evil, when it is already tens of thousands of years old? It seems rather unlikely. Apart from that, though, this is probably the most plausible theory, in terms of the way Arda works. The final theory, however, is far more thematically appropriate.
The Fellowship encounter three monsters in Moria. First, the Watcher under discussion. Second, the creature which duelled with Gandalf at Balin's tomb - the sorcerous shadow which nearly defeated him. Finally, the Balrog, Durin's Bane.
The latter two of these creatures are identical. Could the third one be, as well?
We know that the Watcher was more intelligent than it appears: Gandalf notes (to himself) that it reached first for Frodo the Ringbearer, suggesting a degree of magical sensitivity. We also know that the Balrog was cleverer than it looked - while it acts as little more than a monster at the Bridge, it earlier used magic as powerful as Gandalf's. Is it significant that the Watcher is said to have been sleeping at the far end of the lake? Could it, in fact, have still been partly asleep?
It is significant, in light of this theory, that Pippin aroused the Balrog by dropping a stone down a well. Wells don't usually lead to underground caverns full of orcs - they lead to underground streams. After four days, the Watcher/Balrog may have convinced itself that it had imagined the Fellowship - until a pebble came clattering down onto its head as it roamed through the waterways.
Thematically, it seems appropriate for the only monster to be the Balrog - and it also displays a very specific path through its attributes. Consider:
The Balrog, at Balin's tomb, is a creature of shadow.
At the Bridge, the Balrog bursts into flame.
On the Bridge, we read that 'The fire in it seemed to die, but the darkness grew'; it reverts to shadow.
When Gandalf describes his fight with the Balrog underwater, he speaks of it as 'a thing of slime, stronger than a strangling snake'.
Finally, on the mountaintop, the Balrog bursts back into full flame.
The key point is the 'thing of slime' section: it has no parallel in the story beforehand. It takes place underwater, and describes the Balrog as snake-like. This description doesn't fit the Balrog - but it matches exactly what we know of the Watcher in the Water. Furthermore, by placing the Watcher at the beginning of the sequence, we form a perfect, symmetric pattern: first slime and water, then shadow, then flame, then shadow again, and finally back to slime and water before the climactic battle. Thematically - and mythologically - it works very well.