As Hamilton aborted his last lap, assuming he could not improve on a time that looked good for pole in wet conditions, Rosberg kept on pushing and found the final sector of the circuit had dried enough to go faster.
"It was Lewis' decision because he thought he cannot go quicker but Nico proved you can go quicker and he was proved right," said Mercedes' non-executive chairman Niki Lauda.
Hamilton, who needs to win his home race on Sunday to reduce the 29 point gap between the two title rivals with 11 races remaining, found himself suddenly down in sixth place on the starting grid.
"I don't have much of an answer," the downcast Briton told the BBC when asked why he had not completed his final lap. "I just decided not to do the lap."
Hamilton was not the only one to make a major error of judgement on a changeable day at Silverstone that caught out some of the biggest names in the sport and rewarded some of those more used to lining up at the back.
Ferrari and Williams completely misjudged the weather and failed to get any of their drivers through the first phase when rain started to fall before they had set quick enough times.
Fernando Alonso and Kimi Raikkonen qualified 19th and 20th respectively for Ferrari. Brazilian Felipe Massa, who took pole at the previous race in Austria, was 18th with Williams team mate Valtteri Bottas 17th.
"It was a perfect storm," said Alonso. "It's a narrow line between becoming a hero and a big mistake and we became a big mistake today."
Rosberg, as so often this season, got it right when it mattered - even if he was almost denied his chance by Hamilton going slow in front of him.
"It was a quite crazy qualifying," the German told reporters.
"It was quite wet...I told the guys 'that's it.' And then we were sitting in the box (garage) and we just came to a general conclusion that we might as well go out and have a look at the track.
"Then it seemed like we should give it a go, but even then I still didn't really believe that the track would be better. But what made it was the last sector...it was a lot drier."
Rosberg said he crossed the line to start his final lap a blink of an eye before the chequered flag and so close to Hamilton he was practically in his gearbox.
"With regards to the championship it's good for me that Lewis is down in sixth. It will take him some time to fight through, although I expect him to come through quite quickly," smiled the German.
"I think it's very likely we will be racing each other again. We seem to be very quick on this track, it really suits the car. I think it could be a good battle again."
Red Bull's quadruple world champion Sebastian Vettel qualified alongside Rosberg on an all-German front row with McLaren's Jenson Button - who has never appeared on the podium at his home race - in third.
The weekend is an emotional one for the Briton, his first home grand prix without his late father John in whose memory he is wearing a special pink helmet while fans have been urged to wear 'Pink for Papa' as part of a charity appeal.
"I know it's only a third in qualifying but for us after the last 18 months, we had no chance of getting this result," said the 2009 champion, who was urged last week to try harder by McLaren boss Ron Dennis.
"It's nice in front of a home crowd to qualify well."
While the heavyweights stumbled, tiny Marussia took advantage with Frenchman Jules Bianchi qualifying 12th and British team mate Max Chilton 13th, although the latter has a five place gearbox penalty.
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