Federer, who has won 15 successive matches on grass since being beaten in his opening match in Stuttgart last June, knew he had to win on Saturday to knock Rafael Nadal off the top of the rankings.
He will begin a record-extending 310th week at the top on Monday, his third stint at No.1 this year as he and his old Spanish rival Nadal vie for supremacy.
"I'm very happy, very relieved. I thought it was a tough match (like) I expected against Nick. We've played so many breakers already, I'm losing count," Federer told the ATP website.
"It was close. It could have gone either way, naturally. But I'm happy I got it and get back to World No.1 next Monday, so it's very exciting. And I've got another final, so it's great news."
It is Federer's first tournament in 11 weeks, with the Australian Open and Wimbledon champion having decided to give the claycourt season a miss.
But he was made to work hard to regain the top spot as Kyrgios, also playing in his first tournament after two months out with an elbow injury, refused to buckle in a contest that lasted just short of two hours.
Over their three career matches, eight of their nine sets have now gone to tiebreak and there was little to separate them in Stuttgart where Federer conceded first, forced his way back into the match and then was taken all the way in the third.
In the other semi-final, Raonic beat defending champion Lucas Pouille 6-4 7-6(3) to reach his first final since 2017 Istanbul Open.
The seventh-seeded Canadian has not won a title since the 2016 Brisbane International.
(Reporting by Neil Robinson and Ian Chadband, editing by Pritha Sarkar)
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