It's wonderful that you're doing this! Having a configuration dialog is a great idea. Also, it means there is one less thing for me to feel guilty about not doing. :-)
It seems a little odd to have -interaction=nonstopmode -file-line-error being configurable, given that the output parser will fail without them. How is the user supposed to know that these options are required, without knowing the inner workings of the bundle? What's wrong with just adding them automatically, as now?
I am hoping that these settings will be stored in such a way that Latex Watch can easily find them. (Also, I'd be delighted if Watch were integrated into the main LaTeX bundle. I can see no particular reason for it not to be, and people seem to find it useful.)
I agree that supporting the existing environment variables is not an essential feature. The current situation is such a mess, it's probably a good idea to ditch it and start again.
Robin