The 37-year-old Pacquiao systematically dismantled the former welterweight champion despite Vargas' size and reach advantage.
He used a short right-handed counterpunch to floor Vargas in the second round en route to a one-sided win in front of a crowd of 16,132 at the Thomas & Mack Center.
"I feel happy," Pacquiao said. "I'm trying every round to knock him down but also not be careless."
Pacquiao, 59-6 with two drawn and 38 knockouts, showed he still has a lot left in the tank but he failed to get the knockout victory that has eluded him for the past seven years.
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He then lost it last year to the now-retired Floyd Mayweather, who had a front row seat for Saturday's bout.
"Yes I invited him to come tonight," Pacquiao said of Mayweather.
Asked if he wanted a rematch with Mayweather, Pacquiao said, "We will see."
Pacquiao said he was retiring following his April 9 two-knockdown victory over Bradley in their third fight.
Pacquiao took seven months off to concentrate on his job as a newly elected politician in the Philippine Senate. After serving his first stint as a rookie senator, he says the fire was rekindled and the stage set for a return to boxing.
On Saturday, both fighters felt each other out as very few punches were thrown in the first round.
Pacquiao was quicker to size up his opponent as the Filipino learned early on that he could counter Vargas' left jab with a right to the jaw.
Pacquiao said he had to respect Vargas' punching power.
"I'm very careful to go inside because I knew he would counter me. I felt I could do more but every round I tried to knock him out," Pacquiao said.
Vargas started coming on in the middle rounds. His confidence grew after a strong sixth round which turned out to be one of the few times he was able to trade punches with Pacquiao.
He had a big smile on his face while walking back to his corner after the bell to end the eighth.
Las Vegas boxing fans showed their love for Pacquiao. Even with a hometown boxer in the ring, the crowd was chanting his name and cheering for Pacquiao to get the knockout.
The two fighters traded heavy blows in the eighth round as Vargas' face started to show some of the damage from Pacquiao's potent right hand.
Disclaimer: No Business Standard Journalist was involved in creation of this content