In an Olympics labelled the Women's Games, Kim proved that South Korea's female shooters were every bit as capable as the country's men.
Having roared through qualifying with an Olympic record of 591 out of 600, Wednesday's final was expected to be a procession for the world record holder as she held a six point lead.
But nerves and a determined Chen, who proved why she won gold in Beijing with a brilliant display in the final, led to Kim surrendering the lead going into the last round of five shots at the Royal Artillery Barracks.
But Kim rebounded as she recorded 51.8, including a rare maximum 10.9, in her fourth and final round of the 20 rapid shot final to seal gold and match compatriot Jin Jong-oh, who won the men's 10m air pistol on Saturday's opening day of competition.
"The men are really good but the last time the women won a gold was 20 years ago so before I came to London I wanted to show that the Korean men and women were equally competitive," Kim said through an interpreter.
"I got more nervous than I thought I would. I was trying not to pressurise myself too much, was trying to enjoy it."
That pressure saw the big lead evaporate quickly as Chen shot brilliantly to overhaul the 19-year-old and take a 0.8 point lead into the final round after only failing to score 10 once with her first 15 shots.
But just as she looked to have claimed an unlikely gold, Chen finally cracked with two scores in the nines, much to the relief of Kim.
"Yeah, actually, for that moment I thought I had lost gold but then I thought if I go to bed tonight with a silver medal I would feel really bad and I just concentrated more," Kim said.
"I am not sure if it's a dream or this is reality. The medal is so heavy around my neck. So, yes, it is real."
The 1.57m teenager, offering a shy smile that exposed the braces on her teeth, finished with a total of 792.4 points, one ahead of Chen in second with Ukraine's Olena Kostevych a distant third on 788.6.
Kim, who won the inaugural Youth Olympic Games 10m air pistol title in Singapore two years ago, ran to embrace her coach after victory as she waved to the sparse crowd, the first time at the London Games where a shooting final was not full.
Chen said she had not looked at the leaderboard before her final five shots.
"During the process I didn't really know the changes in ranking and I was just following my coach's instructions, trying to concentrate on what I was doing," said Chen, who took time off from the sport after her Beijing gold to start a family.
"This time was very difficult for me. I have a family and a (three-year-old) baby. Separation is very hard. I miss my home, my family and my daughter. She gives me new life. But it's worth it. A silver medal is very nice."
In third was Kostevych, who collected her second bronze of the Games that have set new records for female participation after she finished third in the 10m air pistol on Sunday.
"I specialise in 10m air pistol, so for me this counts as gold," the 27-year-old said.
1. Kim Jangmi (South Korea) 792.4 points
2. Chen Ying (China) 791.4
3. Olena Kostevych (Ukraine) 788.6
4. Zorana Arunovic (Serbia) 787.3
5. Kira Mozgalova (Russia) 786.9
6. Zsofia Csonka (Hungary) 784.0
7. Jo Yong Suk (North Korea) 782.3
8. Tanyaporn Prucksakorn (Thailand) 778.4
9. Maria Grozdeva (Bulgaria) 583.0
10. Antoaneta Boneva (Bulgaria)