Gay caught world record holder Powell after 50 meters and clocked 9.85 seconds, with Derrick Atkins coming home strongly to claim silver for Bahamas in 9.91.
Powell, whose world record of 9.77 was never in serious danger, took the bronze, his face contorted in disappointment as he crossed the line in 9.96.
"At the start I was just thinking about reacting -- getting out of the blocks with Asafa Powell," Gay told reporters. "I was a little calmer than in the rounds.
"It was hard to stay focused and not get wrapped up in Asafa Powell versus Tyson. I've been waiting for this for a long time."
Gay embraced Powell after finally beating his rival and winning his first world title, offering him consoling words before next year's Beijing Olympics.
"Nobody knows the pressure Asafa was under," said Gay. "He knows why he's the world record holder and it's just a stepping stone to Beijing. He knows the big picture."
Powell acknowledged that the pressure had got to him in sweltering conditions.
"I just tightened up and panicked," he shrugged. "I felt Tyson coming and panicked. During the rounds I felt fine but I made a huge mistake in the final and it cost me the race."
Neither Gay nor Powell had previously won a world title, Powell missing the 2005 championships in Helsinki through injury and Gay finishing fourth in the 200 meters.
Gay ran the season's fastest time of 9.84 at the US Championships in June but had lost all his past five meetings against Powell -- all last year.
Atkins was delighted to beat his second cousin Powell.
"I'm pretty happy," he said. "A silver medal is pretty good for a little country of 300,000 people. I'm happy to be a Bahaman right now and hold our flag high in the sky."
(Reuters)