The win, Villeneuve's third of the season, enabled him to secure second place in the Drivers' Championship behind team-mate Jody Scheckter.
Saturday started bright and sunny, and Alan Jones topped the charts in his Williams for the entire session.
He ended up 1.3 seconds quicker than the Brabham of Brazilian Nelson Piquet, who gained the front row in his first drive at Watkins Glen.
Scheckter had trouble with the engine in his race car and traffic with his spare, and ended up 16th, one spot ahead of the previous season's champion, Mario Andretti.
Keke Rosberg spun and recovered, but he forced Bruno Giacomelli off behind him and into retirement with a bent steering arm.
Reutemann crashed out on lap seven from third place when his fire extinguisher sensing unit came loose and interfered with his pedals.
The other Lotus, driven by Andretti, decided his gamble to start on slicks had not worked and pitted for wets, since it was still raining.
When the rain became heavier, the Ferrari's Michelins performed better; when it slacked off, the intermediate surface favored the Goodyears on the Williams.
Villeneuve coasted home, allowing Elio de Angelis and Hans-Joachim Stuck to unlap themselves, but finishing with a 48-second margin over Arnoux.
The win by Villeneuve was his third, matching champion Scheckter's total, securing a one-two finish in the Drivers' Championship.