Philip Hindes, Jason Kenny and Hoy were ahead from the start and clocked 42.600 seconds to slash 0.147 off the record they had set in the first round.
The London Velodrome exploded with joy when Hoy crossed his finish line before Michael d'Almeida, with the Briton starting a lap of honour after taking his helmet off.
“It’s quite overwhelming, but this hasn’t come out of the blue – we knew if we put this together, and had our best possible race, this was possible,” the Scotsman said.
“Usually we get one or two of us having a good day. We timed the taper perfectly at our camp in Newport. We nailed it, but the question for me was those three rides in one go.
“I dug deeper than I’ve ever dug before. I knew the importance of what it was and I didn’t want to let the boys down.
“They did so well today and it’s just immense pride to do it here in front of a home crowd in the UK. The crowd were phenomenal – that word gets used all the time, but they really have been."
Germany took bronze by beating world champions Australia.
France were left shaking their heads in disbelief after losing to Britain, whom they had beaten regularly in the past four years.
"They had not beaten us in four years, actually since Beijing. Why? How? We don't know. Actually they have found their 'kick', we have to find ours if we are to improve," said D'Almeida.
"They know how to prepare for the Games, it is their objective. They were stronger than us."
Hoy is now tied with rower Steve Redgrave as Britain's second most-decorated Olympian behind cyclist Bradley Wiggins, who claimed his seventh Games medal by winning the time trial on Wednesday.
Hoy, who broke down in tears on the podium, will have the opportunity to add another medal to his tally when he starts the keirin event as the overwhelming favourite on Tuesday.
Britain, however, started the day rather embarrassingly.
In the qualifying session, first man Hindes, who seemed to have trouble with his front wheel, crashed after a quarter of a lap in the match against Germany but Britain were allowed to restart according to International Cycling Union (UCI) regulations.
Hindes then took a cannonball start to perfectly launch Kenny with Hoy finishing it off in style.
Hindes, the only rider who was not in the Beijing team four years ago, pushed so hard on the pedals in the final that he even led France's Bauge, the individual sprint world champion.
Bauge will look to make up for the disappointment in the individual sprint, a discipline he has utterly dominated since Beijing, on Saturday.
"The individual sprint is a completely different affair," warned Bauge.