The third seeded Indo-Czech pair shrugged off a sluggish start to score a 3-6, 6-3, 6-2 victory and claim their second Grand Slam title of the year, having won the French Open in June.
For Paes, who was playing in the US Open men's doubles title round for the fifth time, it was his second crown from the event, having won the title in New York in 2006 partnering Martin Damm.
It was the first time Paes and Bhupathi, who won three Slams together, were up against each other in a Grand Slam, and, obviously, a keen contest was in the offing.
Bhupathi and Knowles were 2-0 up quickly after Paes was broken in the second game. Another break on Paes's serve in the sixth game put the third seeds high in the saddle. They then held as games went on serve thereafter to take the set 6-3 in 38 minutes.
Paes and Dlouhy continued to struggle with their serve and the latter was broken in the first game of the second set. The match looked like being a wash-out, but they broke back in the fourth game, when Paes's forehand down the line return off Knowles's serve brooked no reply. The point fired up the Indo-Czech pair, and after Paes held, they effected another break on Bhupathi's serve after wasting four break-points to go up 4-2.
However, Paes failed to hold in the next game, being broken at love, and surrendered the little advantage they had.
But the see-saw battle continued as Knowles also failed to hold, broken at 15 in the next game, enabling Paes and Dlouhy go 5-3 up.
Dlouhy then held after squandering two set points to take the game after 42 minutes and make it one set apiece.
The stage was set was a battle royal. After the first two games of the third set went on serve, it was Paes and Dlouhy who seized the early advantage, breaking Knowles in the third game, the Bahamas player serving a double-fault on the first break-point he faced.
Paes's serve was under pressure in the fourth game but he saved three break-points after deuce was called four times to hold and give his team a 3-1 lead.
Bhupathi, Dlouhy and Paes then held as play got fast and furious before Knowles was broken in the ninth game, handing Paes and Dlouhy game, set and match after 123 minutes.
Leander Paes, partnering Cara Black, had earlier failed to retain the mixed doubles crown he won last year. The defending champions were beaten by the wild card US pair of Carly Gullickson and Travis Parrott 6-2, 6-4 in the final.
Paes-Dlouhy in last eight
Spotted: Leander Paes at Wimbledon 2008
Spotted: Leander Paes at the US Open
Spotted: Leander Paes
Paes-Dlouhy in second round of US Open