Debugger Keeps Timing Out...

The watchdog this is talking about is a software one inside GDB which is waiting for the target to reply to a command it just sent.

Exactly what code were you stepping over when the error occurred? Does stepping over it in assembler mode make any difference? (It probably doesn't but it will help diagnose the problem). Does step into work whereas step over doesn't?

Finally, this may be due to a hardware problem so it might be worth looking at whether the memory you are running from is working correctly.