Out of the standard dungeons it can drop from, I would do Secluded Forest 3-person Hard, Okuizumo 5-person Hard, or Gedoumaru's Hideout 5-person Hell. SF can also drop Fugens, while the latter two can also drop Watermelons. SF and Okuizumo both have infinite spawns in the boss room. Gedoumaru is only worth it if you can kill more than twice as many mobs per hour vs Okuizumo. See the talk page @
http://onigiri.wikia.com/wiki/Watermelon_Magatama for more details.
Basically, the two best spots for Watermelon Magatamas are also the two best spots for Lord Renges.
Note that Fugens & Lord Renges are even rarer standard drops than Watermelon. I would strongly advise going for field bosses or moon clear rewards instead.