Squads will be able to include three more players than usual in case of positive tests for Covid-19 and subsequent spells of quarantine.
However, actual matchday squads will only be allowed to contain 23 players.
Uefa also confirmed that coronavirus was classed as a “serious illness”, meaning a player can be replaced if he tests positive before a team’s first match.
Grealish has been out injured with a shin issue since February but is hoping for a return for the clash against Manchester United on Sunday.
If he can prove his fitness before the summer, the 25-year-old looks likely to be part of the squad anyway, though any further delay in his return could mean he is more reliant on one of the extra berths.
But the squad increase offers greater hope for striker Watkins, who was called up by England boss Gareth Southgate during the last international break and scored on his international debut against San Marino.
Watkins also notched in the win against Everton on Saturday evening – impressing in front of the watching England boss at Goodison Park.
Wolves skipper Conor Coady looks a definite pick for England barring anything unforeseen prior to the tournament.
Uefa said in a statement: “To mitigate the risks of teams facing a shortage of available players for certain matches due to possible positive Covid-19 tests results and subsequent quarantine measures ordered by competent authorities, it has been decided to exceptionally increase the player list for all participating teams to 26 players.
“However, 23 players shall remain the maximum number permitted on the match sheet for each individual match (in accordance with Law 3 of the IFAB Laws of the game permitting a maximum of 12 substitutes to be named for A-national team matches), including three goalkeepers.
“Once the player list has been submitted on June 1, 2021, current regulations allow unlimited replacements on the player list in case of serious injury or illness before the first match, provided that the replacements are medically certified.”
“For the sake of clarity, players who have tested positive for Covid-19 or who have been declared as ‘close contacts’ of a positive Covid-19 tested person - and therefore put in isolation - by way of an authorities’ decision are considered cases of serious illness and can therefore be replaced before the first match with the approval of the UEFA administration.”
Uefa said goalkeepers would be able to be called up in case of injury or illness before each match.