Fiorente beat Red Cadeaux by three quarters of a length with another 1-1/2 lengths to Mount Athos.
Ruscello, who left the field past the winning post for the first time, ran last. French mare Verema failed to complete the course and is believed to have been euthanasia.
It also gave Damien Oliver his third Melbourne Cup, two months after he brought back to racing from serving a ban for gaming a rival horse in a race he was riding in 2010.
Fiorente staged a thrilling duel with Red Cadeaux before gaining the whip hand at the 100m.
Mount Athos finished third.
Waterhouse’s victory came after twice training the runner-up, Te Akau Nick in 1993 and Fiorente in last year’s race.
Oliver, who won the race on Doriemus and Media Puzzle, brought Fiorente from midfield to stake his challenge at the 300m.
He said it was a prerogative to win the race for Waterhouse.
“It’s amazing, it’s a dream come true,” he said.
“I’m so ecstatic that I could be part of Gai’s first one. She’s done so much for racing and it’s a great honour for me to help bring home her first one.
“Gai was one of the first people to get behind me when I came back and I can’t thank her enough for helping me get going again and we have been a great team together.”
WHERE YOUR HORSE FINISHED IN THE MELBOURNE CUP:
2. Red Cadeaux
3. Mount Athos
8. Brown Panther
9. Super Cool
10. Voleuse de Coeurs
13. Sea Moon
14. Royal Empire
18. Masked Marvel
19. Dear Demi
21. Green Moon
22. Tres Blue