Watson, a five-time British Open champion, won the Senior British for the second time in three years. In 2003, he beat Carl Mason in a playoff at Turnberry. He joins Gary Player (1988, 1990, 1997), Bob Charles (1989, 1993), Brian Barnes (1995, 1996) and Christy O'Connor, Jr. (1999, 2000) as multiple winners of the championship.
"This trophy certainly means something to me," the 55-year-old Watson said. "It was something of a struggle and it looked as if we could have played that 18th hole all night and still been locked together."
Watson won his seventh senior title and first since the 2003 Jeld-Wen Tradition. The victory is his fourth senior major, including the 2001 Senior PGA Championship, the Senior British in 2003 and the Tradition.
Watson held a one-shot lead heading into the final round and closed with a 1-under 70, finishing tied with Smyth (67) at 4-under 280.
Greg Norman, making his Champions Tour debut, shot a final-round 68 and finished third at 3-under. He made a 25-foot birdie putt at the 18th to finish two shots ahead of Craig Stadler, who closed with a 72. Loren Roberts, also playing his first senior event, had a 67 and finished four back.
After both Watson and Smyth parred No. 18 twice, the playoff moved to the par-3 No. 17, where Watson made a par and Smyth made bogey after hitting his tee shot into a greenside bunker. He hit his second to within 20 feet but missed the par putt.
Watson opened with a 4-over 75 and followed with an even-par 71 before shooting a 64 on Saturday.
"This is a beautiful course, everything you look for in a links test," Watson said of Royal Aberdeen Golf Club. "We got to know it better over the last two rounds and that showed in the scoring."