Germany's Sven Hannawald, who enjoyed success at the prestigious Four Hills ski jumping tournament this season, collected the silver.
The leading World Cup jumper, Poland's Adam Malysz, had to settle for bronze.
Born: 25 June, 1981
Started ski jumping: Aged nine
Other interests: Skating, volleyball, mountain biking and the works of German fantasy author Wolfgang Hohlbein
Previous Olympics: Nagano 1998, 35th normal hill, 39th high hill, sixth team event
But there was disappointment for Britain's Glynn Pedersen, who failed to reach the final, finishing 43rd out of 48 jumpers.
Ammann, whose previous best result at a major competition was 26th on the K90 hill at the 1999 Nordic Worlds, made jumps of 98m and 98.5m for a total of 269.0.
Hannawald leapt to 97m and 99m but his style marks were poorer than that of Ammann's, as were Malysz's who made jumps of 98.5m and 98m.
Delighted Ammann said: "It's incredible that this has happened to me at the Olympics. It's a dream come true."
He had suffered an injury to his back and head during training in December and was forced to take a break from the World Cup tour.
The German was gracious in defeat and went over to congratulate Ammann even before the final result was confirmed.
"It is a little disappointing but the best man won today," he said.
"At such a major event, a surprise is always possible"
German coach Reinhard Hess added: "It was a surprise but somebody said to me yesterday: 'You can't rule out Ammann'."
Winds in excess of 80 kph had led to the cancellation of Friday's qualifying, but Sunday brought crystal clear skies and little or no wind.
Britain's Pedersen did at least manage to jump further than Britain's last ski jumper Eddie Edwards did in 1988.
His jump of 78½ metres meant he avoided Edwards' fate of finishing last, and left him looking forward to Tuesday's qualification for the big hill competition.
"The K120 is my favourite hill anyway, and if I address my timing on take-off I still believe I could qualify for that.
"Today was a great Olympic experience for somebody as young as me."