Hardware watchpoints do not work in the Nios® II IDE when the "Use FS2 console window for trace and watchpoint support"settting is turned on in the Debugger tab of the Debug configuration. You will see an error message "The execution of program is suspended because of error." with details indicating that hardware watchpoints could not be inserted and deleted.
To solve the problem, you must use FS2 to control watchpoints if the FS2 console is open. For details, see the FS2 documentation located in <Nios II EDS install path>\nios2eds\bin\fs2\doc.