The story opens with Syaoran and Watanuki communicating via Mokona, and it picks off exactly from xxxHolic Rei’s chapter 38.
Syaoran had contacted Watanuki to retrieve some items that were unavailable in his world, that he needed for his quest. To achieve this task, Watanuki had travelled to a world where both the shop and Yuko existed. For him to live in such a world would have created a paradox (since he is now the “Owner” of the shop), so he needed to be “his old self”, by forgetting his memories and taking Doumeki and Himawari’s memories with him.
Syaoran realizes that this request had given Watanuki pain and apologizes for it. He chose to forget but eventually he remembered everything. Watanuki knew she wasn’t the real Yuko, so he chose to leave her.