Hamm overcame a fall from the vault to grab a last gasp victory with the final routine of the day for a total score of 57.823.
"I thought after the vault I cost myself any medal. My thought was I should shoot for bronze," said a jubilant Hamm, holding his medal tightly.
"I dug down deep and gave it everything I had on the parallel bars and high bar.
"And after high bar, my coach said 'Alright Olympic champion', and I said 'What, no way'."
Mounting the horizontal bar trailing in fourth place, Hamm completed his gravity defying routine to perfection and threw his arms up in the air in victory even before the judges had declared their verdict.
His final score of 9.837 was enough to edge out South Korean's Kim Dae-eun by just 0.012 of a point and spark off ecstatic celebrations around the Olympic Indoor Hall.
South Korea's second representative Yang Tae-young took the bronze.
"GYMNASTICS HISTORY"
"This is the most amazing comeback in gymnastics history," said Hamm's team mate, Brett McClure, who was also in contention for the crown going into the final round.
"Paul's worked really hard and he deserved to win."
Hamm's title hopes appeared to have ended in spectacular fashion in the fourth rotation when he mis-timed his vault and ended up flat on his side before rolling off the mat.
With his disappointment clearly etched on his face, the American walked slowly back to his seat thinking his title aspirations had vanished even before his score of 9.137 flashed up on the screen.
However, after his Chinese rival Yang Wei's gold medal hopes suffered a similar fate less than 20 minutes later when he inexplicably lost his grip from the horizontal bar, Hamm knew he was in with a chance to drag himself up the field and complete a memorable night for the Americans.
"Paul was in 12th place after that vault and that's a hard place to climb out of," said Hamm's coach Miles Avery.
"After that vault I thought he had no odds left. We were so hoping for a medal at that point but after parallel bars I knew we were so in."
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