Yagudin's near flawless performance meant that reigning world champion Evgeny Plushenko had to settle for silver.
American Timothy Goebel, competing in his first Olympics, clinched the bronze.
"Last season was like hell, but I am strong and I just showed that"
But it was Yagudin's day and the Russian, who spends much of his time in the United States, collapsed to his knees and kissed the ice after his impressive display.
"I just fell to my knees and kissed the ice because I live here and won the gold medal here," said Yagudin, who had a high fever in Nagano and was dogged by injuries last season.
"I was just thinking of the hard times I went through. Last season was like hell, but I am strong and I just showed that. It is one of my best."
Yagudin sealed the victory with an impressive display in the men's free programme.
The three-time World Champion landed two quadruple jumps, one in combination with a triple toe-loop and a double loop, a triple axel and four other triples.
Not only did Yagudin execute all the difficult moves, he did so with a flare that has made him a crowd and judge favourite.
The 21-year-old left out a second triple axel attempt, but did not need it after landing the two difficult quad toe-loops.
His other marks were all 5.9s for both technical merit and presentation.
Current world champion Plushenko of Russia did not give up without a fight though.
Sitting in fourth place after the short programme, the 19-year-old moved up to second place by landing two quad jumps and a triple axel.
However, he over-rotated a triple loop and scaled down a triple salchow to a double.
Goebel also rose to the occasion by landing three quads, two salchows, one in combination with a triple toe-loop, and a toe-loop as well as four other clean triples.
There were some other exceptional programmes too.
With nothing to lose and everything to gain, some of the men executed three jump combinations which they had never done in competition before.
Michael Weiss of the United States, who finished seventh, landed a quad toe-loop, triple toe-loop, double loop combination, while Canada's Elvis Stojko performed a quad toe-loop, double toe-loop, double loop to place eighth.
While Goebel landed three quad jumps, Zhang Min of China, who finished 16th, made history by becoming the first man to accomplish the feat in an Olympic free programme as he skated earlier in the evening.