In the upper section of the Undead Burg is a tower that leads up and out to the Taurus Demon fight. Before heading up the stairs is a door which is locked. This key will unlock that door and you will now be able to head all the way down.
At the bottom of the stairs waits Havel the Rock, then Darkroot Basin. You can also use this key to enter Undead Burg from Darkroot Basin.
The Watchtower Basement Key can be found after you defeat the Moonlight Butterfly in Darkroot Garden. After this encounter, head across the bridge and up to the top of the ruins to find the key.
Havel the Rock in the bottom of the Watchtower in Undead Burg.