Playing No. 18 for the third time in an hour, Watson hit a 3-wood to about 18 feet, then made a 22-foot putt, giving an emphatic fist pump as the ball dropped to end the largest playoff in Champions Tour history.
Craig Stadler missed a long eagle putt from the front of the green, and R.W. Eaks missed his 12-footer for eagle.
It was the second victory of the season for Watson, who won the Senior PGA Championship in May.
Gil Morgan, Joe Ozaki, Dana Quigley and David Eger also finished at 9 under for the tournament after a wild final nine holes where the lead changed on almost every hole.
To start the playoff, all seven went off the 18th tee in the same group, but only Morgan was in position to reach to the green in two. His 5-wood was struck well, but the ball was slightly left of the flag and landed in the bunker next to the green.
Eaks hit a perfect pitch with his third shot to 18 inches, putting pressure on the others. Watson hit his wedge over the green onto the fringe, but chipped in from 23 feet, forcing others to make birdie to stay in the playoff.
Only Eaks and Stadler were able to match. Stadler confidently sunk his 22-foot putt, while Eaks patiently waited before tapping in his birdie putt.
Morgan and Eger missed 12-foot birdie putts, while Ozaki's shot out of the green-side bunker hit the edge of the cup but rolled past.
Watson, Eaks and Stadler went back and played 18 again. All three reached the green in two, but Watson kept the playoff from continuing.
The previous playoff record was five players, which happened twice.
Watson could have avoided a playoff and won in regulation if not for his tee shot on the 17th. Leading by two shots, Watson pulled his shot on the par-3 into a small pond fronting the green. Watson made double bogey on the hole, then made par on the 18th.
Watson and Morgan started the day at 6 under, four back of qualifier Ray Stewart, who led after the first two rounds. Watson and Morgan both shot 69, while Ozaki, Stadler and Eaks all shot 67.
The low round came from Eger, who was out early and finished with a 6-under 66. Eger, the 2005 champion in the first year of the event, sat around with an unopened beer next to him waiting to see how the final holes played out.
Stewart, the sentimental favorite from Abbotsford, British Columbia, played a solid first two rounds, but was shaky on the front nine. He still held the lead at the turn, but fell apart on Nos. 15 and 17. Playing in the final group and trailing Watson by one, Stewart four-putted the 15th green for double bogey. He astonishingly rebounded to birdie 16, but then matched Watson and hit his tee shot on No. 17 into the water.
Stewart birdied the final hole, but finished one shot out of the playoff. He was trying to become the first Monday qualifier in Champions Tour history to win a tournament wire-to-wire. Only 10 qualifiers have ever won a tour event, the last being Pete Oakley at the 2004 Senior British Open.
Jerry Pate also missed the playoff by a shot after missing a 2-foot par putt on No. 18.