Walters knocked Donaire down with a short right uppercut in the third, Walters knocked Donaire with an overhand right that landed above Donaire's ear.
Donaire beat the count, but he was on unsteady legs and referee Raul Caiz Jr. wisely stopped it.
"He's an amazing fighter; an amazing champion," Donaire said of Walters. "I was at my best for this. I never trained this hard. I never ever trained this hard for a fight."
Walters, standing now 25-0 with 21 knockouts