The 34-year-old Allenby, 10-0 in playoffs in his pro career, closed with a 4-under 68 to match Watson (67) at 17-under 271 on the Huntingdale course.
'I hung in there all day. I just tried to keep my focus,' said Allenby, also the 2004 winner at Huntingdale. 'It's unbelievable. I've never been so nervous in my life.'
The Australian star, a four-time winner on the PGA Tour, began the historic run two weeks ago in the Australian Open, overcoming a finger injury for a one-stroke victory at Moonah Links. He added the PGA title last week at Coolum, also winning by a stroke.
Watson missed a 3-foot par putt in the playoff on the par-4 18th hole. The 27-year-old former Georgia player earned the final 2006 PGA Tour card available on the Nationwide Tour with a 21st-place finish on the money list.
Australian left-hander Nick O'Hern, who entered the round three strokes ahead of Allenby and four in front of Watson, shot a 73 to finish two strokes back.
Australia's John Senden (70) was four strokes back at 13 under.
England's Paul Casey closed with a 70 to finish fifth at 10 under, and New Zealand's Bradley Iles (68) was another stroke back along with Australia's Peter Lonard (69). Australian star Stuart Appleby (73) was eighth at 8 under.
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