Peterson, whose IBF light-welterweight title was not on the line in a match made at 141lb, was floored by a left hand in the second round before being tagged again in the third.
Referee Steve Smoger gave him one more chance but he was sent crashing to the canvass shortly after and Smoger wisely waved the fight off.
Matthysse has been largely avoided in the division having won 31 of 33 by brutal knockout and lost only to Zab Judah and Devon Alexander in contentious points defeats.
Peterson - previously renowed for his durabillity - was rightly wary in the opening session as he circled his opponent at range, Matthysse only landing a couple of scything left hands.
But the American, who beat Amir Khan in 2011 before failing a drugs test prior to their much-anticipated rematch, tried to close the gap in the second session and paid the penalty.
Matthysse landed a stiff straight right that sent Peterson back into the ropes and in the following a exchange a left hook that landed on the temple saw him belatedly drop to the floor.
Despite wobbly legs Peterson made it to the bell but the signs were ominous and the Argentinian banger duly turned his man and dropped him heavily with a left hook early in the next.
Peterson struggled to his feet and was surprisingly allowed to continue, only for a tame right-left combination to drop him again straight away signalling he had nothing left.
Victory for the 'interim' WBC title holder surely now guarantees him a shot at the full WBC and WBA champion in Danny Garcia, with the pair slated to square off in September in what promises to be a barnburner.
It remains to be seen what comes next for IBF champ Peterson after being so brutally exposed - a clash with recent Garcia victim Zab Judah is favourite.