Trailing fourth into the final bend and seemingly out of medal contention, Hoy roared down the velodrome slope to take the inside lane and powered home to edge Germany's Maximilian Levy on the line to notch his 11th world title.
The 36-year-old Scotsman's brilliant victory brought the curtain down on a championships marked by a dominant performance by Britain and a rash of world records.
Team GB snared five out of 10 of the Olympic category gold medals up for grabs in Melbourne, putting their great rivals Australia in the shade. The hosts claimed only three of the Olympic titles, with Germany and France snaring one apiece.
"You never know, it might be (my last world championships), but if it is, then what a way to finish," four-times Olympic champion Hoy told reporters.
"I'd felt the chance of winning had gone by the time I hit the back straight with half a lap to go, I'd hesitated for too long.
"Normally I would have gone around the outside and just put my foot down but I'd kind of killed the run-on and lost momentum.
"So it was one last chance. I'd never done it before in my life - gone up the inside - it was a real kind of last chance saloon...I couldn't believe the door opened and I managed to get through."
New Zealand's Simon Van Velthooven, one of a clutch of riders nonplussed by the barrel-chested Scot's audacious move, crossed the line third but was later relegated for illegally moving into a rider's line, handing the bronze to sprint silver medalist Jason Kenny.
Britain's coaches were left to marvel at the daring of Hoy, the greatest sprint cyclist of his generation.
"It was a bit like a boxer who goes to the 15th round, loses the first bloody 14 but he's still standing, he's still a chance," Britain's head coach Shane Sutton told Reuters.
"He was gone, 100 meters out, he was gone. But he was still standing, and he took his chance." Hoy became the first Briton to win three golds at a single Olympics in 100 years when he won the sprint, team sprint and keirin gold at the 2008 Beijing Games.
He aims to defend all three at London although his hopes in the sprint suffered a blow with an off-color ride to lose the semi-final against team mate Jason Kenny on Saturday.
However Sutton said Hoy's scorching ride in the keirin was justification enough to keep him in the selection frame for the lone sprint berth, Sutton said.
"One hundred percent. Hoy was untouchable in London," said the Australian, referring to the Scot's World Cup sprint win at the Olympic test event in the London velodrome.
"There was nothing between (he and Kenny) here. They've given us a nice headache." British Cycling performance director Dave Brailsford hailed his riders' performance at Melbourne, upstaging the hosts on their home track and peaking at the right time before London.
"I think it's probably been the toughest world championships I have ever seen. The depth of the competition has been immense. Every single medal has been a real battle," Brailsford told Reuters.
"So from our point of view, we were looking to accelerate our performance and step up as we go toward the Games.
"It's always happy when you see momentum and see progression." MEARES Australia's Anna Meares earlier set a world record to win the 500 meters time trial title, burning around the Hisense Arena to post a time of 33.010 seconds and smash the previous mark of 33.296 set by Lithuania's Simona Krupeckaite in 2009.
It was Meares's second world record at her home championships. The 28-year-old also set a new mark in a flying 200 meters lap of the first qualifying session in the women's sprint.
"I can't be too disappointed with that," said Meares, who previously held the world record from her gold medal-winning ride at the 2004 Athens Games before the event was stripped from the Olympic program.
"I love this event...There's no one else to get in my way for starters and it's pure speed and it suits pure control." Meares tearfully lost her sprint title to British arch-rival Victoria Pendleton in the final on Friday but put the disappointment behind her to win the keirin title the following evening.
New Zealand's Alison Shanks defeated Briton Wendy Houvenaghel for her second title in the non-Olympic women's individual pursuit. Ashlee Ankudinoff won an all-Australian battle against Amy Cure for bronze.
Kenny de Ketele and Gijs Van Hoecke won the non-Olympic madison title for Belgium ahead of silver medalists Britain and bronze-winners Australia.
