Pendleton recovered from a crash in her semi-final with Meares to beat the Australian and advance to a final with Lithuania's Simona Krupeckaite.
A third leg was scheduled after Krupeckaite had levelled their match 1-1, but race officials relegated the Lithuanian for an infringement thus handing Pendleton her sixth world sprint title.
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Meares, who claimed her maiden gold in track's most prestigious event last year, took the bronze medal after dominating Lyubov Shulika of Ukraine.
Pendleton's joy and relief became apparent when she was informed she would not have to race a third leg decider. She collapsed to the ground in tears with relief and joy at winning what she said would be her last world sprint crown.
"This is probably the most significant and probably the most emotional, being the last time I'm going to do this," Pendleton said.
"It means a lot to me. It probably means as much as the first one (in Los Angeles in 2005), which was special, because I never thought I had the ability to be world champion.
"I'm delighted I won but it's nice to win by crossing the line first - relegations always make it a bit weird.
"It's a shame in some respect and it's not great for the crowd either, but they're the rules."
Meares was in tears at missing out on defending her crown in front of her home crowd.
But after paying tribute to Pendleton, with whom she has a fierce rivalry on the track, she promised to push the Englishwoman hard at the Olympics.
"I want to win, I'm a competitor and I want to be perfect but this is an event in which perfection is so hard to come by," said Meares.
"We've seen that tonight, an Olympic year, the qualifications are close and the races are hard-fought, there's crashes and relegations. People are starting to really fight hard because of how important it is.
"I think this is a book which hasn't finished being written yet. The big dance is in London in a few months time.
"I know she's going to be in amazing form, it's her home Olympic Games, this is my home world titles and anything can happen," added Meares, who beat Pendleton in the semis of the London World Cup six weeks ago.
"We could go tit for tat. I won in London, she won in Melbourne, maybe it's my turn to win next!"
At the end of her first semi-final against Meares Pendleton tumbled trackside at high speed after the pair clashed elbows just before the finish, where Meares cruised over the line to go 1-0 ahead.
Pendleton, who suffered only grazing, got back up for the second leg and looked to have the measure of Meares but slowed down going into the home straight after Meares infringed by coming out of her line.
The Australian went on to win but was eventually relegated by the judges.
In the third leg decider Pendleton was leading, but Meares took the lead with just under a lap to go, allowing Pendleton to come round her outside and take the win by photo finish.
"It was very disappointing to feel that I had progressed to the final - and then to lose so agonisingly," added Meares, who was quick to pay tribute to Pendleton after her crash.
"I was right next to her when she hit the deck, I saw it, I heard it, I felt it. But I think that just goes to show Australia and the world what kind of champion she is.
"She picked herself up and dusted herself off and not let it faze her. She's a great champion for that."
