The 30-year-old four-time champion German took full advantage of a troubled session, including a brake failure, for his rival three-time champion Briton Lewis Hamilton of Mercedes.
Vettel clocked a fastest lap in a new circuit record time of one minute and 5.092 seconds to finish two-tenths of a second ahead of Hamilton who will face a five-place grid penalty on Sunday for an unscheduled gearbox change.
Hamilton was fastest several times during the session before, with eighth minutes remaining, he ran off track at Turn Three where a puff of smoke from his right front brakes indicated a disc failure, leaving the driver to slow and stop in an escape road.
His Mercedes team-mate Valtteri Bottas was third fastest ahead of fellow Finn Kimi Raikkonen, the 2007 champion, who was fourth in the second Ferrari.
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Bottas ended the hour's action in the garage alongside Hamilton as Mercedes reacted to their problems by undertaking a careful examination of the machinery.
On a bright, but cloudy morning at the Red Bull Ring circuit in the Styrian Alps, the session also featured an early engine failure for Spaniard Carlos Sainz of Toro Rosso and several major 'moments' as the drivers pushed to the limits ahead of qualifying later Saturday.