The ‘Filipino Flash’ pulled no punches, sending the Mexican to the canvas in the second round before finishing him off with a powerful left at 2 minutes 59 seconds of the third at the Toyota centre.
"I went out there and pretty much timed him," Donaire said. "We knew that he was going to open up. He was a tough guy. He actually got me in the body. I caught him with a good straight right hand and that counter hook came in."
Donaire, who watched Manny Pacquiao get knocked out by Juan Manuel Marquez in the sixth round – also at 2:59 – said it was on his mind during the fight.
"There were a lot of fans that said, you got to get him, this is for the Philippines," said Donaire, who is targeting either Mexican Abner Mares or Guillermo Rigondeaux of Cuba for his next bout.
"But I love Mexico as well. Mexican fighters are tough and I have the best respect for all of them. I'm hoping (the Filipinos) can be proud of what I've done tonight."
The result was enough for Arce to retire.
"My career's over,” he said. “I'm leaving after the best man. I have my family to take care of and my children and I promised them that if I lost, I would leave."
WBA super-bantamweight champion Rigondeaux was scheduled to face Thailand’s Poonsawat Kratingdaenggym on the undercard but the bout was scratched after Poonsawat failed a blood test during the week.
In Los Angeles, Leo Santa Cruz won a unanimous-decision contest over Alberto Guevara to defend his IBF bantamweight title.
Santa Cruz threw a remarkable 989 punches over the 12 rounds despite apparently breathing through his mouth for much of the fight because of a nose injury, and switching to southpaw to give a right-hand injury some relief.
"I've been fighting a lot lately, and I don't think I've been giving myself enough time to rest in between," said Santa Cruz.
"I'm sorry I didn't give that great of a show today. I felt a little different. Usually I throw more body shots, but I couldn't because he was running too much."
The physical issues did seem to hinder the Mexican early on as he found himself back on his heels while Guevara dictated the pace and spacing with swift combinations in between.
But Santa Cruz slowly found his rhythm, and by the second half was dominating, his shots flying inexorably towards Guevera’s head and body and exploding on impact every time.
The judges scored it at 116-112, 118-110 and 119-109.
WBO super flyweight champion Omar Narvaez dominated David Quijano in Argentina with a sharp display that gave his opponent no chance despite being 11 years his junior.
The 37-year-old won emphatically with scores of 120-106, 119-109 and 120-108, punctuated by left and right cross shots that found Quijano’s jaw.