With a second successive MotoGP world title secured in Japan last week, 21-year-old Honda rider Marquez looked destined to match Mick Doohan's record of 12 race wins in a single season when he led by four seconds.
Ten laps from the end, though, his front end was just snatched away from under him and he slithered along the asphalt and onto the trackside grass.
Seven-times world champion Rossi was racing in his 250th premier class grand prix and had won a ding-dong battle with team mate Jorge Lorenzo for what he thought would be second place only to claim his first win in Australia since 2005.
"It is one of the best," said the 35-year-old Italian Yamaha rider.
"To come from third place, to win on the island after 10 years. I'm very happy."
Spaniard Lorenzo was second while Briton Bradley Smith was third in a Yamaha sweep, the Oxford rider securing his first podium when compatriot Cal Crutchlow fell off his Ducati riding in second place on the last lap.
Tito Rabat had been hoping to wrap up the Moto2 title at Phillip Island but had to settle for third place behind compatriot Maverick Vinales and Swiss Thomas Luthi after an error-strewn race.
Spaniard Rabat had needed a victory combined with his team mate Mika Kallio finishing lower than third to take his first title but had to be satisfied with extending his championship lead over the Finn, who was fourth, to an imposing 41 points.
"I pushed until I made some mistakes," said Kalex rider Rabat, who needs to finish in the top six in Malaysia next week to clinch the title. "So I said to myself, 'try to finish ahead of Mika and think of the championship'."
KTM rider Jack Miller gave the locals something to cheer for when he won a thrilling Moto3 race ahead of Marquez's brother Alex and cut the Spaniard's lead in the title race to 20 points with 50 up for grabs in the final two rounds.
The Australian teenager, who had started eighth on the grid, swept past the Hondas of Marquez and Alex Rins in the final lap to take the chequered flag and leave the Spaniards in second and third place.
(Writing by Nick Mulvenney in Sydney, editing by Amlan Chakraborty)
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