The Deadtime Watch is found directly after Alice finishes her battle with the Mad Hatter, having killed him. Unlike all of Alice's toys, this one does no damage to enemies and cannot be used to directly attack them, but as the name implies, it can toy with time.
The watch only has a single use, which is the ability to stop time for a short period (as indicated by the Cheshire Cat who announces this on retrieval). During the period in which it is in use, Alice is able to move around the domain while enemies and other objects which were originally animated will freeze.
It can be noted that it can be only used for a period of time of around fifteen seconds, indicated by the slow-moving image concealing itself back into Alice's willpower meter. After the Deadtime Watch has been used, it may not be used again until the next level, making it more similar to her abilities (such as Rage Boxes and Grasshopper Tea) rather than her actual weapons (however, the watch is more useful as it can be used at any time and not at a set period or level in the game.