Mason, who had only three bogeys through three rounds, double-bogeyed the 72nd hole to fall back to 17-under. Mason finished with a final-round 3-under 67. The four-round total of 17-under-par 263 smashed the tournament record of 11-under-par 269 set by Bob Charles in 1989.
The two players returned to the 18th hole on the Ailsa Course at the Westin Turnberry Resort for the first playoff hole. After both players parred the first extra hole, the duo went back to the 18th tee for a second time.
Watson reached the green in two and his birdie putt stopped within inches of the cup. He tapped in for a par and his second major on the Champions Tour.
Mason struggled on the hole. His drive found a fairway bunker and he had to pitch out. His third advanced just a few feet and he knocked his fourth on the green, but it was too late.
'I got in the playoff with kind of the Watson of old where I made just a lot of long putts,' Watson said. 'I just kind of scrambled around, kind of stayed in the tournament and relied on my short game and my putting to see me through, which it did.'
He had previously won the 2001 Senior PGA Championship. Watson, who won five British Opens, out-dueled Jack Nicklaus to win the 1977 British Open championship at this venue. Watson joins Bob Charles as the only men to win the British Open and Senior British Open on the same course.
'I consider it a great honor to win this championship, particularly at Turnberry where Jack and I fought out that great battle all that time ago,' said Watson, who earns $255,731 for the victory. 'To be honest, I thought I had lost it. Carl played so great all week, I thought he would finish the job. But he didn't. That's golf, I suppose. It has happened to us all at one time or another.'
The win for Watson caps a remarkable eight-week stretch of golf that has seen him finish second at the U.S. Senior Open and tied for second at the Senior Players Championship. He also shared 17th place at the Senior PGA Championship and tied for 28th at the U.S. Open.
Watson had it going early during the final round. He opened with a birdie at the first to cut into Mason's three-stroke lead. He continued his climb to the top with a birdie at No. 4.
As he neared the turn, Watson found himself down three strokes after Mason posted birdies on Nos. 4 and 7. Watson, however, found the magic the has helped him win 44 titles on the PGA and Champions Tours combined.
Watson rolled in a 30-foot birdie putt at the ninth to head to the back nine at minus-14. He then holed a sand-wedge from 112 yards out for an eagle at the 10th to climb back into contention.
He headed to the home stretch down by two shots. Watson birdied the 16th and followed that with another long birdie putt at the next to tie Mason for the lead. Things looked bleak though when Watson knocked his second shot over the green and bogeyed the last hole, while Mason birdied the 17th to take a two- stroke advantage.
'I've said all week, my putter has been magical all week this week,' said Watson. 'I must have made 10 putts over 20 feet this week. The leader of the tournament made a double-bogey on the last hole to let me have a chance, and its almost destiny that that happened.'
Mason found trouble at the last as he double-bogeyed the hole to fall back to minus-17 and create the playoff.
'I knew my position on the last hole. That's why I took the iron,' said Mason. 'I was playing for a five at the worst.'
Mason, who turned 50 in late June, had already earned a victory at The Mobile Cup on the Senior European Tour, but was unable to hold on despite his recent success.
'I don't know what to say,' said Mason. 'I'm proud of the way I played but to get that close and then miss out is extremely disappointing, to say the least.'
Bruce Summerhays carded a 5-under 65 in the final round to finish alone in third place at 16-under-par 264. Tom Kite was one of six men to post all four rounds in the 60s, as he ended at 14-under-par 266.
D.A. Weibring, who entered the third and fourth rounds trailing Mason by one stroke, struggled to a final-round, 3-over 73. He completed the event at 10-under-par 270. Brian Jones and Mark McCumber shared sixth place at 9-under-par 271.
Noboru Sugai, the 2002 champion, was never a factor after an opening-round 67. He closed with a 1-over round of 71 to finish the event at 3-over-par 283.