I did a lot of googling and finally realized the root cause of the problem was the fact that the iPhone was connected to a 5GHz Wi-Fi band and the watch only operates on a 2.4GHz band.
1) You need to ideally restart/reset your watch
2) Connect your iPhone to a 2.4GHz Wi-Fi band
3) Pair the iPhone and the watch
The iPhone then configures the Apple Watch with the 2.4GHz Wi-Fi connection, and then Apple Watch is able to update itself. If you first connect to a 5GHz Wi-Fi and then begin pairing, switching to a 2.4GHz while the pair is in progress will not work.
I hope this helps someone!
ashwinmram
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