Australia won the final by just four runs after setting Charlotte Edwards's side a target of 143.
They could only manage 138/9, with Danielle Hazell unable to produce the required six off the final ball after Holly Colvin had been run out on the penultimate delivery.
"I'm very proud of them," said Edwards, who was named player of the tournament after scoring 172 runs at an average of 43. "For the last 18 months, we've worked towards this - the character of our team showed towards the end.
"We didn't bowl well enough up front and then lost too many wickets - it wasn't our day but Australia were the better side.
"I wouldn't change my decision to bowl first as we saw the girls at the bottom of the order can hit the ball out of the park.
"It's been a great spectacle for women's cricket, which was the main thing, and the best team won."
England put Australia into bat and they shared the runs out fairly evenly. Number three Jess Cameron top-scored with 45 while Meg Lanning (25), Alyssa Healy (26) and Lisa Sthalekar (23) all contributed knocks in the 20s.
Openers Lanning and Healy set the tone with an opening stand of 51 off seven overs to allow Australia to accelerate to 119-2 after 16 overs.
Colvin took 2-21 off her four overs with Hazell adding the other wicket of Healy, while Alex Blackwell (13) was run out by England's Lydia Greenway.
Laura Marsh (8) was the first to fall in the reply to leave England 20-1 in the fifth over and fellow opener Edwards (28) was out in the eighth, closely followed by Sarah Taylor (19) and Greenway (4).
That left England in crisis at 63-4 with nine overs remaining, but they dug in - thanks to Jenny Gunn (19), Hazell (16) and Arran Brindle (13) - to force a sensational finish.
Needing 16 from Erin Osborne's final over with two wickets in hand, Hazell swept the first ball for a single then a no-ball for height allowed England to run two more.
Colvin, who made eight off her five balls, was dropped by Jess Jonassen to allow a single before Hazell ran two on each of the following balls.
Colvin's dash for a second run on the penultimate ball saw her run out and Hazell's heave at the final ball, a low full toss, dropped just short of a fielder at midwicket to set Australia celebrating.
Skipper Jodie Fields was overjoyed to retain the trophy which they won by three runs against New Zealand in Barbados in 2010.
"I love this team, whenever you put on this jersey you expect to fight hard and we did that today," she said.
"England played a really good match, but we had belief in the team and wanted to give a disciplined performance, which I think we did.
"We've worked for this over the last two years and just to be here like this is awesome."
England won the only other edition of the tournament in 2009 at Lord's, also against New Zealand, by six wickets.
- Danielle Hazell
- Charlotte Edwards
- Holly Colvin