Watson, 16, crossed the finish line at the entrance to Sydney Harbour shortly before 2pm (0400 GMT) in her bright pink yacht after 210 days at sea, one month ahead of schedule and three days before her 17th birthday.
Harbour Master Steve Young sounded a pink hooter to signal the official end to her voyage, and a tugboat sent up a celebratory jet of water as the beaming teen steered through the harbour mouth, waving to the throng of onlookers."She's home," her mother Julie wept as she passed the official finish.
Rapturous crowds cheered as the young adventurer cruised towards the white sails of the Sydney Opera House, where she was to take her first steps on dry land in almost seven months for a tearful family reunion.
"I have only managed a couple of hours sleep, but I think I'm running on excitement," Watson said, speaking ahead of the finish."I better take a deep breath before I get in."
Although the World Speed Sailing Council will not recognise Watson's record, as its minimum age is 18, the seven-month voyage makes her the youngest person to ever sail solo and non-stop around the world without help.
Tens of thousands of people gathered along the harbourfront to witness the feat -- many wearing pink and waving banners -- while millions more were expected to tune into the live commercial television broadcast.
Prime Minister Kevin Rudd and current world record holder Jesse Martin, also an Australian, were among those gathered to help welcome Watson back to Sydney, where a hundred-strong flotilla of boats flocked to see her in.
Martin set the 327-day record, then aged 18, in 1999, and he boarded Watson's 10-metre sloop after she crossed the finish line to offer his congratulations and steer her to shore so she could enjoy the moment.
"She's proven to us all that she can do it," said Martin."I think you can say if she can do this she'll be right; she can do anything."
Watson's 23,000 nautical mile journey took her through some of the world's most challenging and treacherous waters, pitting her bright pink 10-metre yacht against 40-foot swells and gale-force winds.
She twice sailed over the equator, crossed all meridians of longitude and passed the world's four capes as she traversed the Pacific, Atlantic and Indian Oceans.