A slurrish contraction of 'Is that so'? Used more commonly in the eastern US states, particularly New York and the New England region. It's a bit on the sarcastic edge.
Donny: I'm the baddest smartest and best looking superstar in this school. Chicks dig me.
Eddie: Zatso?
Eddie: Zatso?
by I Saw U2 Live Twice September 8, 2019