As the polls closed, Mr Smith released a statement which said: “I’m incredibly grateful to all of the Labour members, supporters and trade unionists who have voted for me in this election”.
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“But the electorate can see through the domestic policy, too”.
He said the Pontypridd MP “has been saying “I sort of share your views but I’m just not Jeremy”.
“I will build on the broad policy agreement that stretches across our party, based on a clear anti-austerity agenda”.
A senior Labour source told Sky News discussions will now start between Mr Corbyn, his staff, Mr Watson, Chief Whip Rosie Winterton and representatives of the Parliamentary Labour Party (PLP).
The two were married for five years in the 1970s, having met through the Labour Party.
His comments are likely to deepen the rift between the leader and his MPs, many of whom want to see Labour adopt a robust position on defence.
In a separate development, it emerged Labour workers have been warned they could be faced with “aggressive or potentially violent behaviour” at the party’s annual conference in Liverpool this weekend.
He called for an end to the “sniping and personal attacks” and warned that “anything else would be destructive self-indulgence”.
Mr Corbyn said that regardless of the outcome of the leadership contest, “I will want to work with Owen Smith and all members of our party”.
As the clock ticks closer to the ballot closing, Labour remains in deadlock despite eight hours of talks on how best to form a shadow cabinet.
“The real issue is that his strategy makes the party unelectable because it is in many aspects undesirable”.
“And some of it is meted particularly to female MPs and female members, which I think also is a really unpleasant thing that Jeremy is going to have to now tackle”.
“The people in office believe Jeremy Corbyn will not win a general election, and we are moving backwards”.
Corbyn, who secured nearly 60% of the vote in 2015, is expected to retain the top job.
“I would ask that you please disregard any anonymous or unsourced press briefings which suggest otherwise”.
The party membership has grown massively in the previous year and Labour now has 551,000 members, although there has been controversy over tens of thousands of new members being excluded from voting in the leadership election.
“Corbyn is the first genuinely honest and honourable leader for decades in this country”.
Around 640,000 people were eligible to vote in the election sparked by Mr Smith’s challenge.
“The party is far too important not just for the people who have been in it for an terrible long time but for the values it represents and indeed for the way it wants to represent and govern the country”, he declared.
In an open letter to members and supporters, Mr Smith acknowledged the contest had been “long and bruising” but argued “the truth is it had to happen”.
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And he savaged Mr Corbyn’s “dangerous” lack of commitment to North Atlantic Treaty Organisation given recent events in and around Russian Federation.
