What does the "shed" in "watershed" mean?

It seems like a kind of house; if it is, I cannot grasp the meaning of watershed.

Solution 1:

Oxford dictionary online says

shed2 …(of a tree or other plant) allow (leaves or fruit) to fall to the ground…

A watershed sheds water to either side in much the same way an umbrella or raincoat sheds water.

The British National Corpus has

"I seem to have a veritable Serpentine in my locks," said the newcomer, still shedding water and laughing wildly.

Frankenstein unbound. Aldiss, Brian.

Solution 2:

The New Oxford American Dictionary says:

Early 19th century: from water + shed in the sense “ridge of high ground”, suggested by German *Wasserscheide¨, literally ‘water-divide’

It says of shed, in the sense “allow to fall to the ground”:

Old English sc(e)ādan [separate out (one selected group), divide,] also [scatter,] of Germanic origin; related to Dutch and German scheiden.

Solution 3:

It's worth noting that the word watershed can also mean a critical point that marks a division or change of course.

Watershed is also the name given to the period of time in which programmes unsuitable for children can be shown on public television.

Solution 4:

The word watershed is a compound noun: water + shed.

The simple building, which the OP refers to, is unrelated. A shed is a variant of shade and means a plain structure used for storing things, usually made of wood or metal. Typically at the weekends, a married man might spend hours in the garden or toolshed tinkering away.

The shed in ‘watershed’ instead refers to the verb

shed
1. (transitive, obsolete, UK, dialect) To part or divide.
‘A metal comb shed her golden hair’.
2. (transitive, intransitive) To part with, separate from, leave off;
cast off, let fall, be divested of.
‘You must shed your fear of the unknown before you can proceed.’
‘When we found the snake, it was in the process of shedding its skin.’
3. (transitive, archaic) To pour; to make flow.
‘Did Romeo's hand shed Tybalt's blood?’
4. (transitive) To allow to flow or fall.
‘I didn't shed many tears when he left me.’
‘A tarpaulin sheds water.’

Webster's Third New International Dictionary suggests that watershed is an English translation of German Wasserscheide (also mentioned in F'x answer) and defines the word as

watershed
1. water parting
2. a region or area bounded peripherally by a water parting and draining ultimately to a particular watercourse or body of water, the catchment area or drainage basin from which the waters of a stream or stream system are drawn.
3. something (as a sloping contour or member) introduced into a structure primarily to shed or throw off water.
• a narrow watershed over a car window

And because sometimes a ‘picture’ speaks louder than words...