The row between Labour’s senior official Jennie Formby and Mr Watson exploded when she accused the deputy leader of “unacceptable” behaviour by asking MPs to forward anti-Semitism complaints to him as well as the party.
Mr McDonnell told the BBC: “What Jennie is concerned about is anyone setting up a parallel system of dealing with cases. That wouldn’t be right. This has got to be dealt with by the party itself. That’s why we need ... clarity from Tom really.
“There is no problem about asking for information about progress on individual cases if you’ve reported them.”
He added: “What you don’t want is individual politicians in particular getting involved in setting up some form of parallel process.
“By all means feed your views in. By all means try and improve the process. But let the party officials get on with it.”
Mr Watson hit back at Ms Formby’s comments on Friday, stating he had acted because of a “complete loss of trust” in the party over how complaints were handled.
Mr McDonnell also rejected suggestions that Labour is institutionally anti-Semitic, although he acknowledged there is “clearly” a “problem” within the party.
The shadow chancellor said a “tiny number” of members have been involved in some form of anti-Semitism and argued this has to be eradicated.
He also noted the party needs to react quicker in dealing with anti-Semitic allegations, adding on some occasions it needs to be “more ruthless, more severe, and we’re doing that”.
His remarks came as Labour seeks to appoint former Lord Chancellor Charlie Falconer to scrutinise disciplinary procedures. Labour former cabinet minister Lord Falconer of Thoroton said he is willing to take on a role and is “very keen” the terms are agreed to ensure he has the required resources to be effective.
He also warned that members of the Jewish community have made it clear they have “absolutely no confidence” in Labour nor leader Jeremy Corbyn to fight anti-Semitism adequately, adding the party’s electoral chances could be damaged by such a characterisation.
Asked whether the Labour Party has a problem with anti-Semitism, Mr McDonnell told Sky News’ Sophy Ridge on Sunday: “Well, we clearly do.”