The German ace narrowly beat McLaren's Lewis Hamilton by just over one-tenth of a second in the session's dying moments, with Vettel's Red Bull team-mate Mark Webber third and Jenson Button (McLaren) fourth.
Hamilton had set the best time with some audacious driving, before Vettel -- who claimed last month's season-opener from pole -- snatched top spot with a red-hot 1min 34.870 sec.
Afterwards Vettel credited the Kinetic Energy Regeneration System (KERS), or power-boost, which had been a cause of concern after Red Bull opted not to use it at the last race in Melbourne.
"We got criticism last time for not running it (KERS) and we came here and solved most of our problems," said Vettel, 23.
"I think if we would not have had it today then we would not be here. It is a great achievement, compliments to those guys (in the team). We work hand in hand, so we are pleased."
The all-Red Bull and McLaren front four promises a fascinating start at the steamy Sepang International Circuit on Sunday, where Vettel looks likely to face a strong challenge from Webber and McLaren's resurgent British duo.
Recent weeks have seen suggestions of tension and a war of words between the two teams, but their rivalry on the track has now turned into a full-on battle for success led by the exciting Vettel and Hamilton.
Hamilton, who has not rebuffed talk that he could become Vettel's team-mate at Red Bull, said he was not downcast despite being outshone by Vettel’s last-gasp show of brilliance.
"I don't think we can be disappointed. Going into the last race, we did a fantastic job to be up there on the Red Bulls. I'm proud to be getting some new parts this weekend, we can be happy with it," Hamilton said.
"I would have loved to be on the front row and be on P1 (pole), but these guys still have the slight edge. We have closed the gap a little bit, it seems here. The lap wasn't perfect so I have to improve on that."
Vettel said it had been a "challenging" few days in Malaysia as Red Bull tinkered with KERS, which is considered vital on the Sepang circuit's long straights.
"Definitely it was quite a challenging weekend until qualifying. I was happy with the car, but we never got into a rhythm," he said.
"Yesterday was not as smooth as we hoped for and also this morning we knew we had it in the car, the main thing was to believe in it."
Spaniard Fernando Alonso qualified fifth for Ferrari ahead of Germany's Nick Heidfeld. Brazilian Felipe Massa, in the second Ferrari, was seventh and Russian Vitaly Petrov was eighth for Renault.
German Nico Rosberg was ninth for Mercedes and Japanese Kamui Kobayashi 10th for Sauber.
The end-of-qualifying top-10 shoot-out began with a demonstration of sheer speed and bravery from Hamilton, who swept around the Sepang International Circuit in 1:35.00 to go top.
Button was nearly four-tenths adrift for second and was immediately overhauled by Vettel and then Webber. The top four were separated by less than four-tenths of a second after their first runs.
Alonso was first out in the final flurry along with Webber and Hamilton, and then Vettel. But the Spaniard settled for a solid lap before the Red Bulls and McLarens scrapped for pole.
Hamilton cut his time to 1:34.974 with another scintillating lap, but even that was not enough to curb the exuberant Vettel.
"We always expected they might have a little bit in hand, especially going into the last run," Hamilton said. "They normally tend to pull something out of the bag, and they pull a bit of pace towards the end of Q3."
Earlier, the first mini-session of qualifying was halted when a piece of bodywork from a Toro Rosso car flew on to the track.
After the re-start both Ferrari and McLaren appeared to be struggling and both teams had to switch to soft tyres in the closing stages to make sure of reaching the next session.
Seven-time champion Michael Schumacher was narrowly beaten to 11th in Q2, ruling him out of the engrossing final shoot-out.