Image Processing - Counting nuclei
There are numerous articles on how to handle the oversegmentation problem of watershed, but I think you should read Robust Cell Image Segmentation Methods (scientific article from 2004 by Bengtsson et al).

It covers various methods for segmenting cell images and includes real-world examples that show how to handle oversegmentation from watershed on fluorescence microscopy images similar to yours (it also has examples for bright-field images and confocal microscopy images). It uses seeds from the distance transform, similar to your approach, and merges regions with weak borders. The article reads well and the concepts are pretty straight-forward to implement in Matlab.

For an even more current approach, you can read A Decomposition Scheme for 3D Fuzzy Objects Based on Fuzzy Distance Information by Svensson. It uses a similar method as in Bengtsson et al, but works on the fuzzy distance transform which gives a better density representation for the objects used in the article.