Pendleton's victory is a massive confidence boost ahead of the London 2012 Olympics, while her win over Anna Meares will mean almost as much as another rainbow jersey.
Pendleton got the better of reigning champion Meares in a controversial semi-final that will only add fuel to one of the most combustible head-to-heads in track cycling.
Pendleton and Meares have a rivalry that could never be described as friendly and it certainly wouldn't have been helped by a crash in the first race of their semi-final.
The pair were shoulder to shoulder when Olympic champion Pendleton lost her front wheel and crashed to the track at 65 km/h, judges later ruling she had been impeded and scrubbing the Australian's win.
But Meares dominated their second race, getting her tactics spot on as Pendleton all but conceded defeat at the top of the home straight.
With tensions simmering and a partisan home crowd at their most vocal, the decider went to a photo finish, which Pendleton edged in a victory that had much more significance than just final qualification.
"This is probably the most significant and probably one of the most emotional world titles being the last time I'm going to do this so obviously it means a lot to me," said Pendleton, who plans to retire after the London Olympics.
"I'm delighted to win but it's nice to win by crossing the line first. Relegations always make you feel kind of a bit weird and iffy, so it's a shame in some respects and not great for the crowd either but, you know, they're the rules."
"I was just thinking 'come on Vic, put your legs up, you've got to get ready for a third'."
Pendleton had arrived in Melbourne with question marks over her fitness while Meares had looked in imperious form, setting a world record in qualifying.
And losing her world title in front of her home crowd to her arch-rival will badly hurt, a pain that will only be eased by reversing the result in London.
After that drama Pendleton's final with Simona Krupeckaite should have been low on incident, although the 31-year old British cyclist finally claimed the title after her Lithuanian opponent, who lost the first race, was disqualified in the second.
The 28-year-old Meares recovered to thrash Ukraine's Lyubov Shulika 2-0 for the bronze but was devastated by her semi-final defeat.
"I really did think that I won it," she said, dabbing at her eyes with a tissue.
"It was very disappointing to feel as though I had progressed through to the final and then to lose so agonisingly close in the third round.
"Mentally and emotionally I wavered a bit tonight and paid for it unfortunately."
Elsewhere, Sir Chris Hoy came through a repechage but still progressed to Saturday's men's sprint semi-finals, where he will take on defending champion and British team-mate Jason Kenny, his rival for the one available Team GB place in the event at London 2012.
Australia's Shane Perkins and France's Gregory Bauge, who looks the in-form rider, will contest the other semi.