Thompson, 24, got off to a flying start and quickly surged to the front to cross in 10.71sec, punching the air and embracing training partner Fraser-Pryce at the finish.
Tori Bowie of the United States took silver with 10.83sec while Fraser-Pryce claimed bronze in 10.86.
"When I crossed the line and glanced across to see I was clear (I) didn't quite know how to celebrate," a jubilant Thompson said.
"There is a big screen back home in my community in Jamaica. I can't imagine what is happening there right now."
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Instead it was Thompson who confirmed herself as the next star of Jamaican women's sprinting with an imperious display at the Olympic Stadium.
"What I'm most happy about is that the 100m title is staying in Jamaica," said Fraser-Pryce, who took to the track with her hair dyed in Jamaica's national colours.
"I'm on the podium with my training partner. I'm proud of Jamaica - just look at my hair," Fraser-Pryce said.
Exploding out of the blocks, Thompson quickly edged clear of the field and the powerfully built runner never looked like relinquishing her grip on the contest.
Two other women -- Michelle-Lee Ahye of Trinidad and Tobago and the USA's English Gardner -- also dipped under 11 seconds with times of 10.92sec and 10.94 respectively.
It was the first time in track and field history that seven women have gone under 11 seconds in a single race.