Rudisha, 23, stormed through the first lap in 49.28 seconds and powered to a stunning victory in one minute 40.91secs, taking 0.10s off his previous record as all eight finalists set record times.
Eighteen-year-old Nijel Amos of Botswana claimed silver in a world junior record of 1:41.73, ahead of 17-year-old Kenyan Timothy Kitum, with Britain’s Andrew Osagie taking 0.71 off his personal best despite finishing eighth.
Amazingly, Osagie’s time of 1:43.77 would have won gold at the last three Olympic Games, while it also took him fourth on the British all-time list behind Coe, Steve Cram and Peter Elliott.
“That was simply an unbelievable performance,” London 2012 chairman and former Olympic 800m silver medallist Lord Coe said. “David Rudisha showed supreme physical and mental confidence to run like that in an Olympic final.
“Instead of just doing enough to win the race he wanted to do something extraordinary and go for the world record as well. Rudisha’s run will go down in history as one of the greatest Olympic victories. I feel privileged to have witnessed it in London.”
Rudisha, who has spoken of his desire to race Usain Bolt in the 4x400m relay, said: “It was something special. A world record in the Olympics is something fantastic. I believe I’m going to maintain for a couple of years. I want to become a legend in the 800m.
“I was expecting this year to run a 1:40 and already I’ve done it here so I still want to see how I am going to feel in a few weeks before my last race, whether I can still push it or chase for the world record. If I get (good) weather I can try to do it again.
“Nobody has ever done the world record in the 800m without a pace-setter and I thought it was going to be difficult. I knew I could run 1:41, but breaking the world record was a different story.
“But I was very determined and I knew that I’m in good shape this year. When we started in the heats on Monday I felt the track was fast and I was just praying we would get perfect weather for a fast race.
“To break the world record here is something special and I couldn’t believe it myself.”