The Swiss world number three blunted the powerful serving of Isner with a controlled display, edging the American 9-7 in the first set tiebreak then breaking him twice in the second set to triumph in one hour and 21 minutes.
Federer clinched the title when the towering Isner, who upset world number one Novak Djokovic in the semi-finals and will rise to a career-high 10th in the rankings on Monday, dumped a forehand into the net.
The Swiss, who had won three consecutive titles at Indian Wells from 2004-06, raised both arms skywards in celebration as the capacity crowd at the Indian Wells Tennis Garden erupted in applause.
"This tournament victory couldn't come at a better time in my career," Federer, who has triumphed six times in his last eight ATP World Tour events, said while sitting beside the glittering crystal trophy.
"It's a big tournament, the first Masters 1000 of the season. It's been a long time since I have been this successful here, even though I have had some really good matches here in the past."
Federer expressed a measure of surprise over his victory, having come close to withdrawing from the tournament before his opening match because of a lingering flu bug.
"I was not feeling great for five days overall and I definitely got lucky at the beginning of the tournament," said the 30-year-old, who crushed his long-time rival Rafa Nadal 6-3 6-4 in the semis.
"But I was able to come through, and so convincingly at the end. I've really played amazing these last three matches in particular, so I couldn't be more happy."
On a cool afternoon in the California desert, the opening set went with serve until the 12th game when Federer, leading 6-5, had a chance to break Isner when the American hit a forehand long to go advantage down.
However the 6ft-9in (2.05m) Isner saved that with a 129 mph (207 km/h) serve to force a Federer error and the set went into a tiebreak where the Swiss squandered further set points when leading 6-5 and 7-6.
Federer, beaten by Isner in four sets in a Davis Cup first round tie last month, finally clinched the set on his fourth opportunity when his opponent's backhand service return sailed long.
He broke Isner in the seventh game of the second, unleashing a trademark backhand pass down the line to go 15-40 up before winning the next point when the American netted a backhand volley as he charged forward.
After holding serve to lead 5-3, Federer broke Isner for a second time to end the match, improving his record for the year to 22-2 and surpassing Jimmy Connors and Michael Chang who were both three-times champions at Indian Wells.
Since his semi-final loss to Djokovic at last year's U.S.
Open, the 16-times grand slam champion has been arguably the hottest player on the men's circuit, winning 39 of his 41 matches.
"If I have any shot to beat him, I'm gonna have to play my best and that wasn't the case today," Isner said after competing in his first ATP World Tour Masters 1000 final. "He was too strong.
"I was taking care of my serve, for the most part, up until the end. I don't think I lost the match because I didn't serve as well. He was on top of me, and his forehand was way too good today."