Kramer, the 5,000m champion who was eyeing an Olympic triple gold haul in Vancouver, crossed over into the inner lane at his confused coach's instruction with eight laps to go and squandered a certain gold.
The 23-year-old Dutchman finished more than four seconds faster than Lee Seung-hoon of South Korea, but the shocking error handed gold to former short track skater Lee, who had finished second behind Kramer in the 5,000m.
"I am furious," Kramer, who at first blamed his coach before accepting some responsibility, said.
Russian Ivan Skobrev, who took bronze in the 5,000m, moved up to silver and Dutch veteran Bob de Jong, the 2006 champion, claimed bronze.
Kramer, the three-times world champion and world record holder in the gruelling 10,000m distance, flung his sunglasses away in disgust on the infield when the reality hit home and kicked angrily at lane markers on the ice.
"In a split second I had to take a decision and I took it," Kramer said about his reaction to shouts from his coach to change to the inner lane.
"I cannot explain it. At the end of the day it is the skater who is on the ice. Maybe we have to say we got it wrong. This has never happened to me before."
Kramer's coach, Gerard Kemkers, was devastated.
"It was my mistake, my responsibility," said Kemkers, who has coached the world champion and world record holder since he left the juniors five years ago. "It is a disaster. My world has collapsed.
"It is the worst thing that has happened in my life."
The extraordinary reversal sent the Dutch team into stunned silence. Kramer sat on a bench in the infield with his head down and his elbows on his knees.
In the stands, Kramer's father, twice Olympic speed skater Yep Kramer, looked on forlornly.
It was the second huge Olympic blunder for Kramer.
At the 2006 Turin Games, Kramer fell after stepping on a lane marker during the team pursuit semi-finals, ruining Dutch chances for a gold. They ended up with the bronze.
Kramer was denied the thrill of winning the 100th Olympic gold medal for the Netherlands in Winter and Summer Games combined.
The 23-year-old Kramer may get another chance to put disappointments aside and claim gold in the team pursuit.
Lee, who only switched from short track to long track seven months ago, broke the Olympic record despite the track's sea level altitude and sliced an astonishing 22 seconds off his personal best to clock 12 minutes 58.55 seconds.
"I was very lucky to get the gold medal and if Kramer had not made the mistake he would have the gold medal and so I am very lucky," said Lee.
South Korea have been hugely successful in long track speed skating at these Games with three gold medals two silvers. That is one less medal than traditional powerhouse Netherlands.
Skobrev, matched against Kramer in the final pairing, said he was stunned to notice the Dutchman in the same lane ahead of him as he charged around the turn.
"I suddenly saw him in front," said Skobrev. "It's not only about racing, not only about your shape, your muscles, your body feelings. It's about your head.
"Today he had huge pressure from all the Dutch fans, from his sponsors and he made the mistakes," the Russian said.
"It happens. I feel really bad about it because it was his gold, his Olympic Games."
"But now in one case I think it's good because he will work harder and harder for the Olympics in Sochi," added Skobrev about the 2014 Games in his home country. "It will be a huge event and I will try to kick his ass."
Place of birth: Seoul, Korea
Residence: Seoul, Korea
No previous Olympic results:
Career achievements: Gold, 2008 Short track World Championships, 5000m relay
Silver, 2005 Short track World Championships, 5000m relay
Bronze, 2005 Short track World Championships, 1500m
Third, 2007/08 Short track World Cup, 1500m
Lee grabbed Olympic gold in Vancouver after Dutchman Sven Kramer was disqualifed for lane violation midway through the race. Kramer, Olympic 2010 5000m gold medallist, crossed the line with a comfortable winning time.
Lee started long track speed skating in 2009 having failed to make the South Korean short track team.
The 21-year-old chose long distance events to suit his main strength - stamina.