The second-seeded Mertens recovered from a second-set lapse to edge out Watson, who won the tournament in 2015, in one hour and 42 minutes.
The 22-year-old world number 36 will play Mihaela Buzarnescu in Saturday's final after the Romanian sailed past fifth-seeded Ukrainian Lesia Tsurenko 6-2 6-2 in the second semi-final.
"She made the same run (from qualifying) as I did last year, but I'm happy to win today," Mertens said in an on-court interview.
"I gave it all today, and I'm still playing doubles later.
"I tried to play a bit more aggressive in the third set and make her run a little bit more. She was dictating me in the second set, all credits to her. She played an amazing match."
After a tight opener which was decided by a single break of serve, Watson, ranked 74th in the world, fought back to square the match but her hopes of winning a fourth WTA title were dashed due to unforced errors.
"(It is) just frustrating. Thought I made too many unforced errors," Watson said. "Because I'd been playing so well, I expected more of myself."
(Reporting by Sudipto Ganguly in Mumbai; Editing by John O'Brien)
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