unlocking watch with iphone failed

First try force restarting your iPhone by whatever method your version calls for.  As soon as you see the Apple logo force restart your watch by holding in the crown and side button for 10 seconds till you see the Apple logo then release.  Log into your iPhone and wait for your watch to boot, then log into it.

Failing that I'd try unpairing the watch from your iPhone then pairing it back .

Turn off "Unlock with Apple Watch" under iPhone settings -> Face ID & Passcode (for touch ID, it may be slightly different title).

This is a bug, and Apple will most likely issue an update in the next few days/weeks.

Unpairing and pairing again, turns off “Unlock with Apple Watch”, which is why it appears to fix things.

If you want both, you may be able to do the following dance (assuming you have Face ID; not sure if this will work for Finger Print Reader iPhones)

iPhone screen blank (screen off)

Raise Apple Watch until the numeric passcode unlock screen appears.

Then immediately wake the iPhone and unlock it.

If you wake the iPhone too early, it will not work.

If you wait too long to wake and unlock the iPhone, it will not work.