Watson closed with a 1-under 70 to finish at 4-under-par 280. Smyth shot 4-under 67 to force the extra session.
On the par-3 17th, the third extra hole, Watson dropped his tee shot 18 feet from the cup. Smyth, meanwhile, missed the green right and his ball came to rest under the face of a pot bunker.
The Irishman blasted out to 15 feet. Watson's birdie putt rolled 2 feet past the cup. Smyth then missed his par putt and tapped in for bogey. Watson stepped up and kicked in his par putt for the win.
'Today was somewhat of a struggle,' admitted Watson, who also won the 2003 Senior British Open in a playoff. 'The rhythm wasn't quite there like Saturday. It looked like we were going to play 18 about nine or ten times, but we ended up on 17. Des made an error there and fortunately I have got the cup in my hands.'
The title was the first for Watson since the 2003 Tradition. It was also his first win since losing his longtime caddie Bruce Edwards to ALS in April 2004.
Two-time British Open champion Greg Norman finished alone in third place after his second straight round of 1-under 70. He ended at 3-under-par 283.
Craig Stadler was the last player in red figures, as he came in at 1-under-par 283. Loren Roberts, who like Norman was making his Champions Tour debut, was one stroke further back at even-par 284.
Watson, a five-time British Open champion, opened with a birdie on the par-5 second at Royal Aberdeen Golf Club to get to 4 under. Meanwhile, Smyth had opened with a birdie on the first to move to minus-1.
The 55-year-old Watson then stumbled to a double bogey on the fourth to fall back to minus-2. He got one of those strokes back with a birdie on the sixth.
Smyth birdied the par-5 sixth for the third consecutive round. The Irishman joined Watson in the lead as he birdied the par-3 eighth.
Smyth birdied the 10th, as did Watson as they each climbed to minus-4. Watson, who now owns 12 major titles with eight on the PGA Tour and four on the Champions Tour, made it two in a row as he drained a birdie try on 11.
The 52-year-old Smyth joined Watson atop the leaderboard at 5 under with a birdie on the par-5 12th.
Both Watson and Smyth tripped to bogeys on 13 before parring their final five holes to head to a playoff.
David Eger closed with a 6-under 65 to share sixth place with Derrick Cooper (70) at 3-over-par 287. Mark McNulty, a four-time winner on the Champions Tour, was one shot behind that duo at plus-4.