After finishing the first of two jumps in second place, Lassila showed nerves of steel as she launched herself into the air three storeys high and executed a double twisting triple back flip on her second run to secure the gold medal.
Showing that China is a growing power in aerials with its programme that turns acrobats and gymnasts into skiers, defending silver medallist Li Nina of China repeated the effort in Vancouver while team mate Guo Xinxin won the bronze.
Saying she had always wanted to "jump like a man", 28-year-old Australian Lassila landed two different triple back flips - a feat some male aerialists have not mastered.
As a rowdy crowd of 8,900 waved Australian flags and thrust inflatable kangaroos in the air, Lassila looked ecstatic as she skied down after a clean landing. Once she realised she had won she ran along the fence giving volunteers and spectators high fives before finding a team mate for a long hug.
"After my second jump, that was everything I could do. I was so pleased with my performance," said the former gymnast.
It was in stark contrast to the last Winter Olympics in Turin when she unleashed a blood-curdling scream after her knee disintegrated on landing, not only ruining her chances of winning the gold but raising doubts about whether she would ever compete again.
"I never backed down. I crossed my T’s and dotted my I’s. I’ve had my ups and downs but I’ve fought through and believed."
Lassila had already undergone a radical knee reconstruction after rupturing her anterior cruciate ligament in 2005 and was unsure after her injury at Turin whether she wanted to put herself through the pain again for another shot at Vancouver.
She did not have to look far to find inspiration. Her compatriots Jacqui Cooper and Alisa Camplin both came back from knee surgery to find success.
Cooper shattered her knee at the 2002 Salt Lake City Olympics when she was the favourite to win. She never won an Olympic medal but came back and won a record four World Cup titles. She finished fifth at Vancouver in her fourth appearance at the Olympics.
Camplin won the gold at Salt Lake despite competing with two fractured ankles. She underwent knee surgery 11 weeks before the 2006 Olympics in Turin where she won a bronze and was among the first to congratulate Lassila when she won.
"Every girl that blows out a knee in this sport is by themselves in a very lonely place trying to decide whether it’s worth the effort," Camplin said.
"This is when you’ve got to come from the absolute bottom to the absolute top and Lydia worked her way every single day with gritted teeth.
"It was a joy to see her redemption."
The strong Chinese showing delighted their large crowd of supporters including two people who were pounding away on traditional northern Chinese drums in front of a hand painted sign saying "Go China" in Chinese characters.
A thick fog shrouded the course, making it difficult for the spectators to see though organisers said there was enough visibility for the athletes and the judges. From the stands only the silhouette of the skiers could be seen as they soared high and twisted and flipped in the air.
Noting that Cypress had seen sun, rain, snow and fog in the past week, Lassila said she had prepared for changing conditions and was actually happy to see the thick fog when she arrived since she trained under similar conditions at home.
Once Lassila was done with her jump, she had to wait for China's Xu Mengtao, who had been leading after the first jump. Xu performed the same difficult triple twisting, triple back flip that Lassila did on the first jump but she landed awkwardly on one ski and dropped to sixth in the standings.
Place of birth: Melbourne, Australia
Residence: Diggers Rest, Victoria, Australia
Previous Olympic results:
14th, 2006 Winter Olympics, Aerials
Champion, 2008/09 World Cup, Aerials
Runner-up, 2007/08 World Cup, Aerials
A former gymnast, Lassila started jumping on water ramps in 2000. Her husband, Lauri, is a former Finnish moguls skier.
The 28-year-old, who was named 2001 Rookie of the Year by the International Ski Federation, has her own ‘Body Ice’ business, providing ice packs for professional athletes.
She was hampered by a hip injury in the 2002/03 season and also damaged shoulder ligaments.
In 2005 she missed some World Cup events after suffering concussion and also had knee reconstruction after tearing a cruciate ligament while training on a water jump.
She later spent 16 months away from the sport rehabiliting after another knee injury picked up at the 2006 Winter Olympics.