Poster girl Pendleton, who was disqualified from the team sprint with Jessica Varnish on Thursday, produced an impressive amount of power to claim her second Olympic medal four years after winning the individual sprint in Beijing.
"It's the best moment of my career so far. I had a bad year in 2011 and a lot of people wrote me off and I wanted to prove them wrong," Pendleton told reporters.
China's Guo Shuang took silver after Pendleton resisted her rival's challenge in the home straight.
Hong Kong's Lee Wai Sze took bronze, while world champion and pre-Olympics favourite Anna Meares of Australia had to settle for fifth place.
"I thought I'd get out front early and give myself what I thought would be an advantage over Victoria and Guo but I got squeezed at 200 metres and didn't quite execute," said Meares.
Meares was the first to make her move but she was squeezed in between riders when Pendleton roared from the back and could not respond.
Pendleton, who will retire after the Games, took the lead with about one lap left and never looked back.
She started the day brightly, winning her first and second-round races in impressive fashion with the noisy support of the capacity crowd.
The first massive cheers of the day, though, were for Tour de France champion Bradley Wiggins, who graced the crowd with his presence.
Wiggins, Britain's most decorated Olympian after he won his seventh Games medal by claiming the time trial on Wednesday, was spotted applauding Pendleton, sporting a burgundy Fred Perry jacket over a white polo shirt.
Pendleton, who waved at the ecstatic crowd draped in a Union Jack, was barely able to hold back tears after crossing the line.
She will have the chance to claim a third Olympic medal in the individual sprint starting on Sunday.
“I can barely believe it actually right now,” she said.
“It was really hard with the excitement and the great job the girls [women's team pursuit] did qualifying in a world record and then the guys smash a world record and win a gold medal.
“I was just like, ‘focus Vic, focus Vic you’ve still got a race’, but it was so hard – I can’t believe it.
“Thanks to everyone who helped me get here. The crowd have been fantastic – they really helped me today.
“I’m really looking forward to the sprint. I’ve been working on it a lot and I’m hoping that in the sprint I’ve got a good chance there.
“Just going to take confidence from this and rest up tomorrow and come back with a vengeance.”