The Barrovian youngster has penned a one-year-deal with the Bluebirds, who are currently without a manager following the recent departure of Ady Pennock.
Waterston graduated through the AFC Performance Centre up to under-18s level, before joining Workington Reds.
He scored 10 times and claimed seven assists in 33 appearances for the West Cumbrians before rejoining Barrow in March.
Waterston made his first-team debut for AFC at Macclesfield Town and played an important role in the Bluebirds’ successful battle against relegation from the National League.
AFC managing director Andrew Casson said: “We are very happy to have Nathan back with us for next season.
“It is great to have local talent in the squad, and he showed what he can do when he joined us for the run-in last season, with some great performances and scoring his first goal against Fylde.
“We’re sure he can push on next season and get even better by having a full season with us.”
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