Skipper Smith thrashed 61 from 43 balls, sharing an unbroken stand of 74 with Watson, who added 44 from just 21 deliveries, as Australia posted 193 for four.
Pakistan made a decent fist of their chase, but with the required rate climbing James Faulkner took 5-27 at the death as Pakistan finished on 172 for eight.
Having already lost to Group 2 pacesetters New Zealand and fierce rivals India, Pakistan’s third defeat of the tournament sees them bow out, but Australia now face hosts India on Sunday with the winner joining New Zealand in the semi-final.
Smith won the toss and chose to make first use of a good pitch, although Usman Khawaja played and missed at Mohammad Amir’s first three balls of the contest.
Khawaja pulled Wahab Riaz for six, but was bowled two balls later and David Warner followed in identical fashion in the left-arm quick’s next over.
The recalled Finch also had his stumps disturbed playing back to spinner Imad Wasim on 15 as Australia found themselves 57 for three.
However, Smith and Glenn Maxwell upped the tempo, with the latter driving Mohammad Sami over long-off for six.
Maxwell holed out to Imad on 30, but Watson continued the assault with maximums off Amir either side of pummelling Sami over extra cover for six.
Ahmed Shehzad skied Josh Hazelwood to Nathan Coulter-Nile early in the reply, but Sharjeel Khan kept Pakistan in it with a lively 30 before being bowled by Faulkner.
Umar Akmal gave Watson a taste of his own medicine by launching his medium pace over midwicket, and Khalid Latif blasted Faulkner into the same section of the crowd.
Akmal was bowled by young leg-spinner Adam Zampa, but that only brought Shahid Afridi to the crease and he swiftly dispatched Maxwell over long-on.
Another six off Zampa followed, but Afridi – who after the match said he was going to consider his future in international cricket – was stumped next ball for 14 in what may prove to be his last innings for Pakistan.
Faulkner extinguished any hope Pakistan had achieving their target by bowling Khalid for 46 and having Imad held at mid-on from the following delivery, before completing his maiden T20 international five-for with the scalps of Sarfraz Ahmed and Wahab in the final over.