Your Mac was unable to communicate with your Apple Watch.

I Unpaired my iWatch from my iPhone and then went to"Use my Apple Watch to unlock apps and your Mac."

To enable unlock with my watch I go to System Preferences -> Security & Privacy and tick the "Use your Apple Watch to unlock apps and your Mac." Sometimes I get prompted for my password to unlock my disk and sometimes I don't. In either case, "Turning on..." with a spinning icon is displayed for a few seconds, and then I get an error message from the subject of this post. It also says to "Make sure your Apple Watch is unlocked and on wrist, and your iPhone is unlocked."

The issue is this kept happening. The best way I found to resolve this is a bit long winded but it worked and hopefully it will save someone else the frustration.

Steps (follow at your own discretion)

1. Open "Keychain Access"
2. In "View", enable "Show Invisible Items"
3. Search for "Auto Unlock"
4. You should see a whole bunch of application passwords for "Auto Unlock: XXXX's ..."
5. Select all records and delete (this will reset/disable auto unlock on other Macs if you use multiple Macs)
6. Whilst still in "Keychain Access", search for "AutoUnlock" (no space)
7. There should be 4 entries for "tlk" "tlk-nonsync" "classA" "classC" Select 4 records and delete (don't worry if they re-appear, the system repairs this automatically)
8. Open "Finder" and navigate to "~/Library/Sharing/AutoUnlock"
9. There should be two files "ltk.plist" and "pairing-records.plist"
10. Delete both files Open "System Preferences" and try enabling auto unlock.
11. You may need to enable it twice, the first attempt will fail.
12. You may need to restart your PC if Step 11 doesn't work