Van Gerwen powered past Phil Taylor's previous best of 118.66, set against Kevin Painter at the 2010 UK Open, with an unplayable performance to delight a capacity crowd at the GE Oil & Gas Arena.
The Dutchman fired in legs of 11, 12, 11 and 12 darts to open up a four-leg lead in just over four minutes, before hitting back-to-back ten-dart finishes to push his average above 135 in-running.
Three missed doubles to record a whitewash win allowed Smith in to finish 116 in the seventh leg, but double 16 in the next sealed van Gerwen's incredible performance, as well as his third successive win this season.
"It's fantastic," said van Gerwen, who could have averaged 136 had he landed double 18 to win the seventh leg. "I'm always thinking about 110, 115 averages but not 123!
"I felt confident straight away and I played well from the start, so I'm happy with my performance and it was an amazing game.
"When I was 6-0 up I realised I could make some records and I missed a couple of doubles. If you play like this it's amazing and I'm really glad it came out tonight. I hope I can do this many more times in the future."
A night of stunning quality also saw Taylor average 115.25 in his 7-5 victory over Dave Chisnall in another exceptional contest - with the six-time champion recording the 11th highest televised average in history to respond to van Gerwen.
Chisnall led 3-1 at one stage and hit three 11-dart legs during the game, but Taylor took out a key 126 in his revival before capitalising on his rival's two misses to snatch a draw by returning on double eight to claim the win in a dramatic decider.
"Everything's coming together and I'm so pleased I played well tonight," said Taylor. "I'm trying hard and every time I looked Dave seemed to be hitting a 180.
"I'm over the moon to win - it's all about scrambling to make the cut, and I've got six points in the bag."
Reigning Premier League champion Gary Anderson had earlier brought the 4,000-strong Aberdeen crowd to its feet with a memorable 7-3 win over Raymond van Barneveld to get his season back on track.
The World Champion had lost his two matches since missing the opening week through illness, but was back to his heavy-scoring best to see off the Dutchman with a 103.34 average as he took five of the game's final six legs.
"It's not often we get to Scotland and when we do get here you want to play well and win, but once the crowd started singing and changing I found it really hard to concentrate," said Anderson.
"I've never had a reception like that - I was shaking."
He added: "Turning up to Aberdeen with no points wasn't good. I needed to get a point and to get two's a bonus against Barney. I need to get back on the practice board but although I'm not 100 percent I'm getting there."
Peter Wright remains a point clear of van Gerwen, Adrian Lewis and Taylor after he continued his unbeaten start to the season with a draw against Robert Thornton, who picked up his first point of the campaign.
A mid-game surge had seen winless Thornton take three successive legs for a 6-4 lead, but Wright battled back to claim a share of the spoils from the all-Scottish clash.
Lewis, meanwhile, continued his strong start to the season by claiming his third win out of four matches in another thrilling contest as he edged out James Wade 7-5.
Wade led 2-0 at one stage and took out 120 and 121 in successive legs to open up a 5-3 lead, but Lewis finished 142 and an 11-darter to move 6-5 up before taking the deciding leg on double one after the left-hander missed eight darts for a draw.
"I'm really pleased with that," said Lewis. "I couldn't score much better than that and I want to keep this going.
"Both of us were playing really well and James took out some massive finishes and it came to the last leg and neither of us could get over the line - but I got away with it."
The Betway Premier League continues at the Westpoint Arena in Exeter next Thursday, with the four matches including the top four clashing as Taylor meets Lewis and Wright faces van Gerwen.
Betway Premier League
Night Four - February 25
GE Oil & Gas Arena, Aberdeen
Adrian Lewis 7-5 James Wade
Gary Anderson 7-3 Raymond van Barneveld
Michael van Gerwen 7-1 Michael Smith
Phil Taylor 7-5 Dave Chisnall
Peter Wright 6-6 Robert Thornton
Adrian Lewis v James Wade
0-1 - Lewis is first to a finish but misses five darts at double top and ten, allowing Wade in to break on double 14.
0-2 - The leg sees three successive 180s hit, with two maximums coming from Wade before he lands tops to complete a 12-darter to double his advantage.
1-2 - Lewis finishes tops to hit back.
2-2 - Wade misses darts at double eight and four, and Lewis follows a 180 by capitalising on tops to level the game.
2-3 - Wade fires in a maximum before breaking throw for a second time, landing double eight.
3-3 - Double ten sees Lewis break back once again to square the contest.
3-4 - Wade takes out a clinical 120 finish to win another leg against the throw and regain the advantage.
3-5 - The pair trade 180s, but Lewis is left waiting on 41 as Wade finishes 121 on the bull to move two legs clear with a second successive ton-plus checkout.
4-5 - Lewis hits back by landing double four.
5-5 - Wade wires double 14 for a 148 checkout, and Lewis steps in to finish 142 with a superb combination to level a high-quality contest.
6-5 - Both players hit 180s before Lewis finishes 64 on double eight for a sensational 11-darter to move ahead for the first time in the game, securing at least a draw.
7-5 - The game enjoys a dramatic ending, with Lewis missing six darts to claim victory only for Wade to miss eight darts to claim a point, allowing the 2011 Premier League finalist back in on double one to finally seal the points.
Gary Anderson v Raymond van Barneveld
1-0 - Anderson makes a flying start by finishing 121 on the bull, with van Barneveld sat on 40.
1-1 - Double 16 sees van Barneveld level.
2-1 - Anderson misses four darts at doubles, but van Barneveld misses tops to steal the leg as the World Champion returns on double one.
2-2 - van Barneveld lands a 180 and tops to hit back.
3-2 - The pair trade 180s, with van Barneveld missing tops for a 120 finish to break throw, allowing the Scot to hit double 18 and edge ahead.
4-2 - Anderson fires in another maximum before hitting tops to break and move two legs clear.
5-2 - The reigning Premier League champion hits a 180 for a third straight leg before double four pushes him three legs ahead of his rival.
5-3 - The duo swap 180s before Anderson is punished for two misses at double 16 as van Barneveld hits tops to respond.
6-3 - Double top sees Anderson secure his first point of the season.
7-3 - Anderson seals his first win of the 2016 Betway Premier League on double four.
Michael van Gerwen v Michael Smith
1-0 - van Gerwen makes an explosive start with an 11-dart finish, taking out 87 on double 18.
2-0 - Smith lands a 180, but van Gerwen replies in kind before finishing tops for a 12-darter to break throw.
3-0 - van Gerwen hits a 174 score and defies another maximum from Smith by taking out 87 again for a second 11-darter - with legs of 11, 12 and 11 darts he is averaging 132 in-running!
4-0 - van Gerwen's incredible form continues as he finishes 132 with a spectacular bullseye, bullseye, double 16 combination to thrill the capacity Aberdeen crowd.
5-0 - The Dutchman opens with two 180s and adds another treble 20, missing the treble 19 for a possible nine-darter but going on to finish double 16 for a ten-darter.
6-0 - The astonishing display continues as van Gerwen scores 140, 180 and 145 before double 18 secures a second successive ten-dart leg and seals a minimum of a point - averaging over 135 van Gerwen is on course to smash the world record televised average.
6-1 - van Gerwen misses three darts at double 18 to compete the win, and Smith takes out 116 on tops to hit back - landing his first dart at a double in the game.
7-1 - van Gerwen lands double 16, at the second time of asking, to complete the win with a world record televised average of 123.40.
Phil Taylor v Dave Chisnall
1-0 - Double 16 gives Taylor the opening leg.
1-1 - Taylor lands a 180 but misses double 12 for a 141 finish, allowing Chisnall in on tops to level.
1-2 - Chisnall opens with a 180 before breaking throw by taking out 88 for an 11-darter, with Taylor sat on 36.
1-3 - Chisnall adds a second successive 11-darter, hitting another maximum and double 18.
2-3 - Taylor opens with six perfect darts of two 180s, with Chisnall landing a maximum in reply but unable to prevent Taylor finishing an 11-darter.
3-3 - Taylor takes out 126 on double six to level with a superb 12-darter.
4-3 - Double 16 sees Taylor level another high-quality contest, despite Chisnall opening with a 180.
4-4 - Chisnall kicks off with his fifth 180 before finishing tops for a third 11-darter of the contest - with both players averaging 115!
5-4 - Taylor edges back in front by hitting double top.
5-5 - Chisnall hits double top in reply to level the contest.
6-5 - Chisnall posts another maximum, only for double 16 to seal a minimum of a point for Taylor.
7-5 - Taylor tees up a possible nine-darter for the second time in the game with two 180s, and after the perfect leg slips away once again, he recovers from missing two darts at double 16 to land double eight after Chisnall wastes two darts at tops to claim a draw.
Peter Wright v Robert Thornton
1-0 - Wright takes out 100 on tops to claim the opening leg.
1-1 - Thornton levels, hitting a 180 before finishing 95 on tops.
2-1 - Wright lands a 180 and tops to move back into the lead.
2-2 - Thornton pins double five with his third dart to take the leg as he squares the game again.
3-2 - Wright hits double top for a third time in the game.
3-3 - Thornton lands a 180 before punishing a miss at tops from Wright by returning on double one.
4-3 - Wright takes out 81 to edge back in front.
4-4 - Double 12 sees Thornton hold throw once more to level.
4-5 - Wright misses double 12 to finish 138, allowing Thornton in to take out 60 on tops for a break of throw to move ahead for the first time.
4-6 - Thornton secures his first point of the season, finishing 80 on double five to secure at least a draw from the match.
5-6 - Wright misses double six to finish 126, but Thornton misses tops to claim the win as his rival returns on double three to send the game into a deciding leg.
6-6 - Wright lands a 174 score to be first to a finish before completing a 14-darter to claim a draw and remain a point clear at the top of the league table.