It was Venus's first win over Serena in a Grand Slam final since the 2001 US Open, and levelled their head-to-head to 8-8.
The sisters have always struggled to produce their best against each other but their seventh Grand Slam final exceeded all expectations.
The competitive tone was set early in the way Serena took on Venus's serve from the outset and broke in the opening game thanks to a stunning backhand winner.
She pressed home the advantage by holding to love and if there remained any doubt that there would no quarter given, it was banished when Serena approached a short ball and hit it straight at her sister - with Venus somehow putting away the volley.
Serena had a point for a 4-1 lead but Venus saved it with another deft volley.
The defending champion clawed her way back to 4-4 but then had to save another two break points before the crowd witnessed the first indication that the two competitors might be related.
Serena hit a backhand which she thought was going wide, audibly admonishing herself as she did so, but the wind kept the ball in, and the umpire was forced to call a let.
Serena, though, went straight to her chair, conceding the point.
Interview: Serena Williams
The set looked likely to go to a tie-break, with both players serving impressively despite the difficult conditions.
However, Serena faltered at 5-6, allowing Venus to snatch the set after 53 minutes.
It was a set which featured 38 winners and only 13 unforced errors and the level hardly dipped in the second.
In a gripping 14-minute game, Serena broke to take a 2-1 lead but Venus, who was the more composed of the two throughout, hit straight back.
Just as in the first set, Venus got stronger as the set went on and after seeing one break point slip by at 3-2, she struck at 5-4 to end Serena's hopes.
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