while I've never made one, I've seen many and can give you my definition from an observers perspective. A watercolor quilt doesn't use lines to define the subject of the quilt, but rather uses the colors in various patterns (I've seen mostly florals used) to build the picture. And all the watercolors I've seen are done with small squares of fabric - perhaps cut at 1.5 or 2 inches. If you paint a watercolor, particularly wet brush technique on a wet background, you get a painting that has no defined line, but rather a blending of the colors that were used so that the color moves from one to the other smoothly. The watercolor quilt is the same way, no (or very limited) solids, and lots of patterns with varying shades and tones of color. It's the careful placement of these squares of fabric that build's your picture. What you want to see is not the pattern on each piece of fabric, but the overall pattern that they make together. Dina Pappas has a quilt shop here in AK and designs and publishes watercolor quilt patterns.
Her technique is really rather cool, she irons the pieces onto a gridded fusible backing then when they're all in place, she folks the backing with squares on the grid lines and sews straight lines to stitch all the squares together.
Maybe lots more than you wanted to know, but that's my perspective.