Watson fired a 7-under-par 65 to finish tied for the lead after 54 holes with Loren Roberts and Brad Bryant.
All three players parred the first playoff hole, the par-5 18th. Bryant was eliminated on the second playoff hole when both Watson and Roberts birdied 18 the second time around.
The playoff then moved to the par-4 10th and Watson essentially clinched the win with his second shot, a 9-iron approach that stopped three feet from the flag.
Roberts was already in the rough and three-putted for a six before Watson rolled in his birdie putt to seal his third career Champions Tour title.
Roberts fired a 2-under 70 to earn a spot in the playoff while Bryant, who entered the day with a two-shot lead, signed for an even-par 72.
Jay Haas shot a 71 and finished a shot behind the leaders at 6-under 210.
This was the second consecutive event on the senior circuit that went to a playoff. Bernhard Langer defeated Haas in a marathon seven-hole playoff in last weeks Toshiba Classic.