Afghanistan, led by a brilliant allround performance from Karim Khan Sadeq, restricted Pakistan to 103-7 from its 20 overs after posting a decent target of 125-8.
Opening batsman Sadeq made a useful 19 runs and the offspinner later dented Pakistan's run chase with twin strikes in the 14th over.
"I know more than 500,000 people back in my city of Jalalabad would have already started celebrating," Sadeq told The Associated Press.
Afghanistan coach Rashid Latif said Afghan president Hamid Karzai had already congratulated team members.
"Mr. Karzai rang up our manager Nazim Jaar while we were going to Athletes' Village in the team bus and congratulated all the team," Latif said.
Bangladesh had a five-wicket win over Sri Lanka in the later semifinal, with left arm spinner Mohammad Sohrawordi taking four wickets for six runs to dismiss the Lankans for 101. Banlgadesh lost five wickets before reaching the winning target with 4.4 overs to spare.
That means the final of the first men's cricket tournament staged at the Asian Games will not feature one of the subcontinent's big three teams. India didn't even field a team, while Pakistan and Sri Lanka didn't send strong squads but were expected to reach the gold-medal playoff.
Bangladesh has full status with the International Cricket Council, but Afghanistan is not among the 10 elite nations in the sport, despite its impressive run to qualification for the Twenty20 World Cup and its narrow miss in qualifying for the 2011 World Cup.
So it was a massive sporting boost for the war-torn country.
Sadeq wrapped the national flag around his shoulders as all the Afghanistan team officials ran to the ground as soon as the match ended and hugged each other. Most of the Afghan players also knelt down and kissed the turf.
"It's our way to thank god," Sadeq said after he also kissed the wicket.
The team officials and players also went to the stands where around 30 Afghanistan supporters cheered and waved national flags in jubilation.
Sharjeel Khan (23) provided Pakistan a blistering start when he twice pulled and once drove fast bowler Shahpur Zadran's for boundaries off three successive deliveries in the first over. Pakistan raced to 30 in the first three overs before Mirwais Ashraf had Khan leg before wicket.
But it was the big wicket of captain Khalid Latif (26) in the 11th over which really halted Pakistan's run charge.
Latif had a verbal altercation with wicketkeeper Mohammad Shahzad just before he tried to sweep Mohammad Nabi and was adjudged lbw with the total of 60.
"Khalid's wicket was the turning point and we were confident that our spinners would not let them score freely," Nabi said. "The asking rate kept on going up and that put pressure on Pakistan's middle order." Karim removed Shehryar Ghani (3) and Pakistan's under-19 World Cup winning captain Azeem Ghumman (11) in his second over as Pakistan lost five wickets in space of 17 runs.
Medium fast Hamid Hasan also chipped in with two wickets Naeem Anjum (5) and Jalat Khan (9) as both holed out in in desperation.
"We have to play for bronze tomorrow and that's disappointing for us," Latif said. "Our middle order batsmen took too much pressure after I got dismissed, but I think Afghanistan spinners did a good job." Afghanistan's total revolved around Shabbir Ahmed's 35 that featured two sixes and as many fours after Sadeq and Shahzad gave a decent start of 35 in five overs.
Ahmed dominated 46-run fifth wicket stand with Mohammad Asghar (10) and gave enough runs to his bowlers to defend.
"Everyone was waiting for this match back home and I can well imagine how happy all of them will be," Nabi said.
