Seagrass was deemed to be heading for extinction in this region before the otters returned.
But scientists found that the animals triggered a chain reaction of events that boosted the water-dwelling plants.
The research is published in the journal, PNAS.
The urbanisation of California has led to a huge increase in nutrient pollution in coastal waters, from increasing use of nitrogen-rich fertilizers.
This is said to be the reason for the dieback of seagrass, which has also been declining worldwide.
This research suggests that the hunting to near-extinction of sea otters in the late 19th and early 20th Century may have exacerbated the problem, and conversely that their reintroduction is helping revive ailing seagrass populations, even in the face of hugely nutrient-rich water.
The researchers assessed seagrass levels over the past 50 years in the Elkhorn Slough in Monterey Bay, and mapped their increases and declines.
They looked at a variety of changes that may have affected the grass, but the only factor that really matched the changes in seagrass was sea otter numbers.
They theorised that sea otters were eating the crabs which prey upon small invertebrates in the water.
These invertebrates eat a type of algae which blooms when there are more nutrients in the soil. It grows on the leaves of the seagrass, shading them from sunlight and causing them to die back.
This is quite a complex cascade of effects, so the researchers tested out their theory by comparing similar estuaries with and without sea otters, and by doing experiments in the lab, and in the field.
These experiments, which included putting cages that sea otters either could or couldn't access, down on the seagrass, confirmed their hypothesis.
Brent Hughes, lead author of the study, said: "This estuary is part of one of the most polluted systems in the entire world, but you can still get this healthy thriving habitat, and it's all because of the sea otters.
"So it's almost like these sea otters are fighting the effects of poor water quality."
Hughes described seagrass as "the canary in the coalmine" in terms of predicting levels of nutrient pollution in the water.
It also acts as a nursery habitat for many species of fish and it uses CO2 from sea water and the atmosphere, thus potentially helping with climate change.
Not only that, but it acts as protection to the stability of the shoreline.
Hughes said: "It's what we call a foundation species, like kelp forest, salt marsh or coral reef. The major problem from a global perspective is that seagrass is declining worldwide. And one of the major drivers of this decline has been nutrient inputs from anthropogenic sources, via agriculture or urban runoff."
These findings are of particular interest at the moment, as a ban on sea otters moving along the coast to southern California was lifted last year. The ban was in place as there was a fear the sea otters would impinge on fisheries in the area.
Hughes told BBC news: "That's important because there's a lot of these kind of degraded estuaries in southern California because of all the urban runoff from places like Los Angeles and San Diego.
"Coastal managers will now have a better sense of what's going to happen when sea otters move in to their systems.
"There's a huge potential benefit to sea otters returning to these estuaries, and in to these seagrass beds that might be threatened."
The return of sea otters to an estuary on the central Californian coast has significantly improved the health of seagrass, new research has found.