The Citizens scored twice in the first half and four more times in the second to complete their mission of becoming the first English side ever to lift all three trophies - the Premier League, EFL Cup and FA Cup - in a single season.
Watford started well as Ederson produced what proved to be a big save to deny Roberto Pereyra early on, shortly before a strong penalty shout was turned down, and from that point on it was all about the English champions' brilliance.
David Silva started the rout 26 minutes in and Sterling helped himself to a cup final hat-trick, while Gabriel Jesus and substitute Kevin De Bruyne - superb during his time on the field - were also on target in the one-sided final.
The six-goal margin of victory equals the FA Cup final record set by Bury in 1903, rounding off what has been an incredible season for Pep Guardiola's treble winners.
City made a tentative start to the match and were grateful to keeper Ederson for keeping the match level with 11 minutes on the clock.
The Argentina international's first touch set him nicely, but Ederson closed down the angle and made the save with his leg.
Then, after having a penalty appeal turned down when Doucoure's shot hit the arm of Vincent Kompany, Watford found themselves a goal down as Sterling cushioned the ball into Silva's path and the Spaniard tucked his shot away from Heurelho Gomes.
That goal ended a run of 27 games and 2066 minutes since Silva last found the net, and it transformed City as they looked a lot more like their usual selves from that point on.
Following a spell of pressure, Bernardo Silva lifted the ball over Watford's defence, Jesus flicked it goalwards and Sterling helped it over the line from the crossbar to become the first player to both score and assist a goal in an FA Cup final since Alexis Sanchez for Arsenal against Aston Villa in 2015.
It could have been 3-0 before the interval as Riyad Mahrez, lively in his hour on the field, had a powerful shot saved by Gomes at the Brazilian's near post.
Watford took a lot more risks in the second period, sensing a first cup triumph slipping away from them, but they struggled to create any opportunities to rival the one Pereyra squandered early on.
Deulofeu scuffed wide when getting the wrong side of Kompany, and with that miss the Hornets' cup hopes ended as De Bruyne killed things off.
Jesus latched on to Sterling's pass in behind and squared it for De Bruyne who, six minutes after being brought off the bench, dummied his initial shot and then had the simple task of converting into an unguarded net.
The fourth arrived seven minutes later through another counter-attacking goal, this time rounded off by Jesus as he exchanged passes with De Bruyne and coolly converted past compatriot Gomes.
De Bruyne lifted a curler into the stands from a glorious position, but City did not have to wait much longer for their fifth as Bernardo fizzed the ball towards the back post and Sterling was there to convert from five yards out.
The emphatic victory was rounded off by Sterling three minutes from time, converting at the second attempt after his first shot was tipped on to the post by Gomes.
Substitute John Stones nearly made it seven late on, which would have set a new record margin of victory in the FA Cup final, only for an outstretched leg from Gomes to stop him from doing so.
MANCHESTER CITY (4-3-3): Ederson; Walker, Kompany, Laporte, Zinchenko; Bernardo, Gundogan (Sane 73'), D.Silva (Stones 79'); Mahrez (De Bruyne 56'), Jesus, Sterling
WATFORD (4-5-1): Gomes; Femenia, Cathcart, Mariappa, Holebas; Deulofeu (Gray 66'), Capoue, Doucoure, Hughes (Cleverley 73'), Pereyra (Success 66'); Deeney