The southpaw dropped his opponent for the final time with a devilish left uppercut and the victory improved the eight-division world champion's record to 60-7-2.
Pacquiao said he worked hard but was surprised by the swift win in the World Boxing Association welterweight title fight.
"With Senator Emmanuel "Manny" Pacquiao's victory against Lucas Matthysse for the WBA welterweight belt, the Palace is one with the Filipino people in celebrating this tremendous feat", Presidential Spokesperson Harry Roque said in a statement.
He knocked out the 35-year-old Matthysse in the seventh round, following a combination of multiple punches.
Duterte said: 'I would like to congratulate Senator Manny Pacquiao for giving us pride and bringing the Filipino nation together once more'.
And when Matthysse went down for the third time in the seventh, referee Kenny Bayless stepped in to stop the contest.
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Pacquiao rebounded from his disappointing loss previous year to Australian Jeff Horn and his victory could extend his boxing career that had taken a backseat to his political life as a Filipino senator. "We did a good job in training and controlled ourselves", he added.
A shell-shocked Matthysse had come in with a record of 36 knockouts in 39 wins with just four defeats.
"I'm no longer young, so thanks to my trainer and all my team members".
During the fight with Floyd Mayweather in 2015, Pacquiao's camp claimed that the lawmaker tore his rotator cuff, which prevented him from throwing jabs against the undefeated boxer. "Sometimes you win and sometimes you lose - today was my turn to lose, but I lost against a great champion and a legend".
"He's a great fighter and a great champion", Matthysse said.