The four-year-old colt, a 14-1 shot, roared home in the final straight of the 3,200 metre handicap, reeling in master trainer Aidan O'Brien's Johannes Vermeer to clinch "the race that stops a nation" by half a length.
The William Mullins-trained Max Dynamite came third, completing an Irish trifecta, as pre-race favourite Marmelo faded to ninth in the A$6.2 million (3.62 million pounds) race after a bright start on a cloudy, chilly day at Flemington.
"I just can't quite believe it," said Joseph O'Brien in front of terraces packed with a festive Public Holiday crowd.
"His prep went really well and (jockey) Corey (Brown) gave him an unbelievable ride. It's not often in a big race that everything goes so well. Over the moon."
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Ballydoyle trainer Aidan O'Brien has made a number of bids to win the world's richest two-mile handicap over the past decade. He prepared Mahler for a third place finish in 2007 but victory continues to be elusive.
"I've spoke to (my dad) and he's delighted," Joseph O'Brien said.
Rekindling's win gave jockey Brown his second Melbourne Cup win after he rode the Mark Kavanagh-trained Shocking to victory in 2009.
The Australian said it was a nice reward after having to fight for rides during a lean patch between his Cup wins.
"I can't believe it," the 41-year-old said, celebrating with his wife and three daughters.
"It's a dream to just ride in the race, but to win it again, I'm just lost for words.
"I just felt a little bit left out, I'd lost my spot, just chipping away trying to get back to where I was. I'm just starting to feel the love now."
The Gai Waterhouse-trained Cismontane made the early running but it was the two O'Brien-trained horses that muscled their way to the front as they turned into the straight.
Johannes Vermeer, ridden by Ben Melham, moved first and bolted clear as the terraces roared but was unable to hold off a furious finish from Rekindling.
Rekindling continued Ireland's fine Melbourne Cup record since the Dermot Weld-trained Vintage Crop raced away with the 1993 trophy and became the first winner prepared outside Australia and New Zealand.
It was a powerful Irish assault on Tuesday's race, with six in the field of 23 groomed by the country's trainers.
Mullins-prepared Thomas Hobson finished sixth, steered by 18-year-old apprentice jockey Ben Allen, who was a late replacement for Joao Moreira after the Brazilian suffered a fall in an earlier race at Flemington.
Local businessman Lloyd Williams extended his record to six Melbourne Cups as an owner, having celebrated his fifth with winner Almandin in last year's race.
Almandin, second-favourite despite carring a significantly heavier weight this year, was 12th.
"It's terrifically exciting," said Williams, who praised Brown's ride on Rekindling.
"We wanted someone who could ride the weight and a serious rider."
(Reporting by Ian Ransom, editing by Nick Mulvenney/Peter Rutherford)
