Kostner picked up the global crown a decade after making her debut with a career-best score of 128.94 in the free skate giving her a total of 189.94.
The 25-year-old eclipsed her closest rival, Russian Alena Leonova, by more than five points with a classical and near flawless routine to Mozart's Concerto No. 23.
Japan's Akiko Suzuki trailed in third with 180.68. Kostner has long been the standout female skater in Europe, winning four continental titles in the last six years, but is equally known for her spectacular meltdowns.
None was more painful than the one she suffered a hop, skip and jump away from the French Riviera. At the 2006 Turin Winter Olympics she became the butt of jokes in her country after falling on her bottom on practically every jump she attempted.
On Saturday, she finally laid her demons to rest.
"It has been 10 years since I've been a senior skater and today was finally my time. I am so, so, so happy," a beaming Kostner told the hollering crowd.
"Being so near Torino reminded me of the Olympics and I thought this was my chance to make amends."
Sporting a slinky, silver bodysuit, Kostner would not have looked out of place if she had skated to the hit song "Sexy and I Know It" that heralded her arrival on the ice.
There were no hip-shaking antics from her though. Instead her sublime, classical performance sent her flag-waving Italian fans into a frenzy.
It seemed as if Kostner had turned the Acropolis Arena into a mini Italy as every man, woman and child held his or her collective breath each time she launched herself into the air.
Each safe landing was greeted with deafening cheers.
After Kostner nailed her 11th and final jump, the fans leapt out of their seats to turn the stands into a sea of red, white and green knowing the final spins were just a formality to completing victory.
Leonova followed in the blades of her idol Irina Slutskaya when she became the first Russian woman in seven years to win a medal at the world championships.
The 21-year-old swapped the knee-high pirate boots she donned for Thursday's short programme for more traditional skating gear on Saturday and her silver-medal performance provided the 2014 Winter Olympic hosts with a timely boost.
In one of the weakest fields at the world championships, with 2011's top two Miki Ando and Kim Yuna both missing, Japan had high hopes of sweeping the podium.
But Mao Asada, the only former women's champion to show up in Nice, failed to pull off her signature triple axel and from then on her programme unravelled and she finished sixth.
Kanako Murakami failed to reproduce the form that helped her finish second in the short segment and slipped to fifth.
American women drew a blank for the sixth year running even though Four Continents champion Ashley Wagner recovered from her nightmare outing on Thursday to produce a breathtaking Black Swan free skate.
But she could not make up the deficit to push herself into the medals and had to settle for fourth.
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