The St Helens ace struck darting perfection in the third leg of the second set, just moments after Van Gerwen had missed double 12 for the holy grail himself.
The start was everything a packed Ally Pally could have wished for with both players going at it hammer and tongs. However, the honours went the way of Van Gerwen 3-1 against the darts with a 99.3 average and two 180s.
The third leg of the second set saw absolutely astonishing scenes with Smith landing the first nine-darter of the tournament after Van Gerwen missed double 12 for one of his own.
Smith went on to take it 3-1 to level up with an incredible 128.09 set average, winning it in just 34 darts, as MVG set a new record of the highest losing average in a set with 120.73.
The 32-year-old hit the front for the first time in the contest just after wiring the bull for a spectacular 170 checkout.
In a real heavyweight clash Van Gerwen defied two 180s in the leg from Smith to complete a stunning 90 finish with two double 18s before Smith nailed his 11th 180 of the game to break the tournament record of 880, but it was Van Gerwen who levelled up after sinking 83 for a whitewash set.
Van Gerwen then produced a stunning 10-dart leg to force a fifth set decider in which he clinched against the throw in 14 darts to regain the upper-hand.
He was putting them away moments later, though, after missing darts at doubles to allow Smith to take a 4-3 advantage.
Smith, featuring in his third world championship final in five years, opened up a cushion for the first time in the final, sealing his third set on the spin to move two clear.
But MVG held his nerve to seal the 10th set to stop the rot and keep his title hopes alive, but he squandered a two-leg lead with Smith taking out a big 106 finish and then sinking double eight to finally get his hands on the Sid Waddell Trophy.
