The world No.1 won 17 points in a row early in the contest in a show of real dominance but then had to save a set point in the second set on her way to a 6-3 7-6 (7-3) victory at the Caja Magica on Saturday.
It is a third title in the Spanish capital for Sabalenka, who lifted the trophy in 2021 and 2023 before losing to Iga Swiatek 12 months ago.
"It was a really tough match," Sabalenka said. "At the end of the second set it was really intense and I was very emotional. I am happy I was able to handle my emotions."
The Belarusian now has a lead of more than 4000 points over her stuttering rival in the rankings, although the result does mean Swiatek stays ahead of Gauff at No.2.
Sabalenka adds the Madrid crown to titles she won in Miami and Brisbane, with her superb consistency meaning she's reached the final in six of the eight tournaments she has played so far in 2025.
Gauff has hit form again too after a difficult spell but looked helpless as Sabalenka reeled off her remarkable sequence of 17 points in a row to lead 4-1.
The American regained her composure and, although she could not salvage the first set, she broke serve to lead 2-1 in the second.
Gauff, who had won five of their previous nine meetings, served for the set at 5-4, but Sabalenka finally took her fifth chance to break back, saving a set point and seeing the funny side when she dropped her racket in the middle of one rally.
Gauff then saved a match point serving at 5-6 with a brave second serve, but Sabalenka forged ahead again in the tie-break and was handed the title on her second match point thanks to a double fault from her opponent.
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