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Satellite rainfall estimates (SRFE) are a promising alternative for the lack of reliable, densely distributed, precipitation data common in developing countries and remote locations. SRFE may be significantly improved when corrected based on rain gauge data. In the present study the first complete validation of the Tropical Rainfall Measuring Mission (TRMM) 3B42-based MERGE product is performed by means of ground truthing and hydrological modeling-based applications. Four distinct, highly anthropogenic watersheds were selected in the Upper Paraíba do Sul River Basin (UPSRB)—Brazil. The results show that when compared to TRMM Multi-Satellite Precipitation Analysis (TMPA) 3B42V7 at the watershed scale, MERGE has a higher correlation with observed data. Likewise, root mean square errors and bias are significantly lower for MERGE products. When hydrologically validated, MERGE-based streamflow simulations have shown the capacity of reproducing the overall hydrological regime with “good” to “very good” results for the downstream lowland sections. Limitations were observed in the hydrological modeling of the upstream, highly anthropogenic, dammed watersheds. However, such limitations may not be attributed to MERGE precipitation since they were also obtained for the individually calibrated rain gauge-based simulations. The results indicate that the used MERGE dataset as a hydrological model input is better suited for application in the UPSRB than the TMPA 3B42V7.