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Negotiations went on for a few monthsbut Dortmund ultimately stood firm on their €100 million (£90m/$123m) valuation of the winger, which the Red Devils refused to meet due to the financial uncertainty caused by the coronavirus crisis.
Sancho's form has dropped significantly since the conclusion of the saga, with the England international only managing to score five goals in 19 appearances for Dortmund in the first half of the 2020-21 campaign.
Watzke thinks talk of a potential move to Old Trafford served to distract a talismanic figure who had previously played without any pressure on hisshoulders.
"Subconsciously, Jadon had probably already prepared a little for a change," the Dortmund chief told Kicker."I think he had at least thought so much about it that he lost his ease. I have found him trying very hard for weeks."
Watzke added on Sancho's struggles this season: "The biggest difference is that he used to not think about his next ball action. Now he thinks about it, and the tenth of a second that he misses is often exactly the one in which the opponent is already on his feet.
"The more you try as a creative person, the more difficult it often becomes."
Sancho bounced back by scoring in Dortmund's 2-0 victory at home to Wolfsburg at the weekend, and Watzke hopes an improved performance will serve as a springboard for the young attacker to get back to his best.
"I think he needs two or three success stories in a row, then things will quickly improve again," he said. "He is still one of the greatest talents there is."