The number six seed went down 6-4 7-5 in a match lasting one hour and 33 minutes in south-west London.
One break of serve was enough to give Rybarikova the first set.
Trailing 5-4 in the second, Watson prolonged the match by breaking her opponent, but the world number 192 won the next two games to take the title.
British number two Heather Watson lost the final of the Surbiton Trophy in straight sets to Slovakia's Magdalena Rybarikova.