Silver went to American Michael Tinsley, who finished strongly in a personal best of 47.91 seconds.
Pre-race favourite Javier Culson from Perto Rico - the fastest man this year - was run into bronze with a time of 48.1s while world champion Dai Greene of Britain was out of the medals in fourth.
Culson must now contend with accusations that he fails in the big occasion, while Greene has struggled for form this season and only snuck into the final as a fastest loser.
The 33-year-old defending champion Angelo Taylor - who also won in Sydney 12 years ago - came fifth.
In emotional and moving scenes, Sanchez sobbed on the podium and throughout his country's national anthem, unable to restrain the flow of tears.
As light rain fell, the 34-year-old from the Dominican Republic said he had felt his grandmother Lillian was there with him in the Olympic stadium.
"It started to rain. It made me feel like she was crying tears of joy with me," said Sanchez, little over three weeks away from his 35th birthday.
"I've been emotional all week, thinking about her, thinking if I could win."
Sanchez, the Athens Olympic and twice world champion, pinned a picture of his grandmother behind his race bib and ran with her name on his spikes.
His grandmother passed away during the Beijing Olympics four years ago and Sanchez made a promise that day to win a medal for her.
"I got news on the morning of the first round in Beijing that she had died," he explained.
"That affected me. I cried the whole day. I ran but I ran badly and I made a promise that day that I would win a medal for her. It took me four years.
"We got here and I pinned her picture under my bib so she could run close to my heart. I wrote her name...at least what I called her in Spanish...grandmother ... on my spikes.
"Just as a motivator and just as a reminder of how special she was to and how much this Games meant to me being how old I was."
Sanchez was untouchable in the event in a golden period between 2001 and 2004 when he won 43 consecutive races before a thigh injury ended that sequence in Brussels.
World champion in 2001 and 2003, Sanchez's fortunes started to wane as a succession of injuries took their toll, although he did take world silver in 2007 and was fourth last year.
Throughout the ups and downs, Sanchez said he never lost hope of being the best again.
"I've had a lot of setbacks in the last eight years. I really wondered if I could come back.
"But I was dominant for so long. When you are so dominant you have a sense of confidence," he said.
"I always had a glimmer of hope. I was running well, then I would get injured, then as soon as I was healthy again I would get another injury.
"But I knew I was running well enough to compete with these guys. I never lost that motivation to be number one again. Having had all that success. That's what kept me going."
Despite an indifferent season, Sanchez said he had trained hard, although it was not until he clocked his fastest time in eight years in the semi-finals that he thought he could win gold.
"I knew If I could put it all together I could win again," he said.
"I thought it would have to be a perfect race for me, and it was."
On a great night on the track for the Dominican Republic, 19-year-old Luguelin Santos won silver in the men's 400 metres.
"A country that only had three medals in the last 40 years in the Olympics. Now we have two at this Olympics in track and field back to back about 40 minutes apart," Sanchez beamed.
"I am sure they are going crazy in the Dominican Republic right now."