Sorry if this has been explained but I've only read the OP: Is there any other use for the word that better explains why a watermelon pops up other than playing on a racist stereotype? Someone obviously went in there and programmed the game accept that word and respond this way so it's hard to call it a mistake. Disregarding Kotaku sensationalism and the internet's popular response of getting offending by someone calling out racism, it seems kinda fucked up the game does this at all.
It's a type of gourd, which looks a lot like a watermelon. It makes sense that it uses the same sprite. It truly is an unfortunate coincidence, but I think it is foolish to consider it anything more.