I found the script, so I can make an answer out of this that's more than just my opinion. The show ends with only a token few lines of dialog from Bashir and Sisko, neither of them addressing the minutia of rank. Nog, Jake and Collins discuss the news article that Jake may (or may not) write, but this is largely a debate of opinion. Starfleet we know is very big on reports and we can infer Nog will have to make a full report before returning to duty, or even have to undergo a full debriefing (like the Temporal Investigations department does to Sisko in Trials and Tribble-ations - the loss of a starship is a big deal, and eyewitness accounts will be all the more important as records and logs probably didn't survive).
Anyways, the point is that the report Nog makes will have to deal primarily in fact, not opinion. The facts of the Valiant, as shown by the episode are these:
- The crew consists only of Cadets, the 7 proper Starfleet officers assigned to the mission were killed.
Watters himself has only - at best - a field commission to captain. He may only be acting captain as dictated by being the senior officer surviving in the chain of command, in which case his rank is still officially Cadet. Watters claims it was an actual battlefield commission, but it is not hard to imagine him bending the truth for the sake of holding the crew together.
"Sir" is correct, ensign. I was
given a battlefield commission and
command of this vessel by the late
Captain Ramirez. Using that
authority, I've also commissioned
and promoted other members of Red
Squad as needed.
Watters is not doing a very good job as captain. To quote the script:
Watters is under tremendous pressure as the captain of this ship. He sleeps too little, drinks too much coffee and (as we'll learn) is secretly taking medication to keep himself going. Watters can't allow himself to unbend even for a moment, lest he come unglued.
- Despite the crew holding a hero/god opinion of their captain, Jake expresses misgivings over Watters' abilities and decisions from the start, and by the end of the episode Nog has come around to the opinion as well.
NOG (to Collins)
He may have been a hero... he may
even have been a great man... but
in the end, he was a bad captain.
It is revealed that, regardless of the validity of his field commission, Starfleet does not even know that Watters is in command of the ship, much less that he has been interpreting orders and using the full authority of a legitimate captain. This is almost certainly a violation of duty, communications and secrecy considerations aside.
My orders are to collect technical
data on a new Dominion battleship
operating in this sector. We keep
picking up their com traffic, so
we know they're still in the area,
but since we can't go faster than
warp three point two, we're unable
to get within sensor range.
And Starfleet knows that you're
in command of the Valiant?
No. We've had to maintain strict
radio silence ever since the war
began. The orders were addressed
to Captain Ramirez, but since he's
dead, the mission is now mine.
And make no mistake, I will carry
out that mission...
... or die trying.
- Watters finally completely oversteps the last shred of his authority by deciding to attack the Jem'hadar battleship. He does so without orders and without informing Starfleet. This would probably be a court martial offense even for a commissioned officer. What does that say for Watters' chance at having his battlefield commission, of which there is no direct evidence, be recognized by Starfleet?
If Watters' provisional rank of Captain is annulled, any and all promotions he issued would be annulled as well. Nog's actions aboard the Valiant will certainly be added to his record, but it's hard to say whether Starfleet's final opinion of the personnel under Watters would be favorable or unfavorable. Regardless, it would be almost impossible for Starfleet to consider an Ensign worthy of 3 promotions to Lt. Commander based on a single mission.
For those reasons, I deem it likely that Nog's field commission was invalidated without shame upon his return to Deep Space Nine. That's if he even bothered to tell anyone about it; given how his opinion of Watters has fallen, and that his rank is quietly returned to Ensign for the remainder of Season 6 and 7 with no on-screen mention, it's easy to imagine Nog leaving this out an official report to Starfleet. In that case, Nog necessarily returns to his active rank of Ensign.