Nesbitt, the world champion and World Cup leader, claimed the Olympic title by a scant two-hundredths of a second in one minute 16.56 seconds that met with thunderous cheers when the time was posted.
Annette Gerritsen of the Netherlands took the silver in 1:16.58, with compatriot Laurine van Riessen the bronze medallist with a time of 1:16.72.
The Canadian, who was born in Australia before moving to Canada as an infant, was only 15th fastest after 200 metres, and ninth best at the 600-metres mark before she turned it on to thrill the local crowd.
She seemed disbelieving when coach Marcel Lacroix told her she was the winner, and he accompanied her on several victory laps pausing to stop by the barrier for a hug and kiss on the lips from her Dutch speed skating boyfriend Simon Kuipers.
"I cannot believe I won," Nesbitt said after a furious charge to the finish allowed her to overcome some panic at the start of the race and eventually claim Canada's third gold medal of the Vancouver Games.
"It wasn't pretty, I know it wasn't pretty," said Nesbitt, the world champion and runaway World Cup leader who is unbeaten over the distance this season. "I was fortunate to win Olympic gold. It was probably the worst 1000 I've done this year."
The analytical Nesbitt, 24, said she felt very nervous before the race and let it affect her.
"As soon as the gun went off, I panicked off the start. I had a slip after two or three steps. I wasn't quite right. In a sprint it's hard to get out of that. It can be tough to fix. I was almost trying too hard, maybe.
"I've had races like that, where I panicked, and I think that's why I was able to skate a good last lap because I've been there before and I was able to still finish strong."
While Nesbitt did not look happy after her time was posted, the home crowd thundered its approval when she edged into first place with one pair still to skate.
When compatriot Kristina Groves and Margot Boer of the Netherlands failed to beat her time, the first Canadian speed skating gold medal of the Vancouver Games was hers and the Richmond Olympic Oval erupted in noise.
Canadian Prime Minister Stephen Harper congratulated Nesbitt over the telephone, telling her "the country is thrilled, and we're all very proud," his representative said in a statement.
The Dutch oompah band Kleintje Pils, which has been providing music at the venue, burst into the Canadian national anthem and the crowd went wild.
"I don't know how to react," said Nesbitt, who vowed to study tapes of her race to fix her problems before the 1500 metres race. "I don't feel like I won Olympic gold."
Place of birth: Melbourne, Australia
Residence: Calgary, Canada
Previous major Olympic results:
Silver medallist, 2006 Winter Olympics, team pursuit
Career achievements: 2x Gold medallist, 2009 World Single Distances Championships, 1000m, team pursuit
Gold medallist, 2007 World Single Distances Championships, team pursuit
Silver medallist, 2008 World Single Distances Championships, team pursuit
Bronze medallist, 2009 World Single Distances Championships, 1500m
Bronze medallist, 2007 World Singles Distances Championships, 1000m
Champion, 2008/09 World Cup, 1000m
Nesbitt first played hockey before taking up short track speed skating at 12-years-old and then switching to long track when she was 18.
Her switch from short to long happened because she was denied entry onto McGill University’s short track program in Montreal. She instead studied at the University of Calgary and turned to long track.
The student, educated in geography, is now coached by Dutchman Ingrid Paul having previously spent five years with Marcel Lacroix up until 2008.