A late dash from Lewis Hamilton underlined McLaren's improvement as he closed within 0.778 seconds of the German to join him on the front row.
Mark Webber's Red Bull and Jenson Button's McLaren echoed the pattern in third and fourth places.
Ferrari struggled for speed and Fernando Alonso will start fifth.
Sunday's race begins at 0700 GMT.
Vettel, who claimed 10 pole positions on his way to last year's championship, dominated each phase of qualifying around Albert Park and only needed one shot to secure first place on the grid, as the rest of the field failed to reel him in.
Not even his team-mate Webber could find the pace to match him and finished 0.866secs adrift.
"That is a huge gap and Webber will be disappointed," said BBC F1 analyst Eddie Jordan. "Psychologically that will be a big blow."
"That was some kind of dominant performance from the young German and the reigning world champion," added BBC F1 commentator Martin Brundle.
Vettel himself was clearly delighted with the performance of the RB7.
"It was a bit of a funny winter beause a lot of things changed, the car changed a lot, and we all had to work our way with the [new] tyres, but coming here it looks quite promising," he said.
"The key is to finish the race, to see the chequered flag, because last year I had to retire halfway through. But we've had a very, very good preparation, we hardly had any reliability issues, and the car is not too slow, so things are looking good. Today was the base, and it couldn't be any better."
Team-mate Webber clearly found it hard to come to terms with the extent of his failure to match his team-mate's effort.
"I couldn't do the times today, I was disappointed with my performance," the Australian admitted.
"I tried my best. I'm a little bit mystified by the gap to Seb, but I'll have a look and see where I can improve."
McLaren underlined their improvement after a torrid time in winter testing as Hamilton ended the day as Vettel's closest rival with Button in fourth.
The 2008 world champion, who lost his KERS boost during final qualifying (considered to be worth around three-tenths of a second per lap) said he was thrilled to be on the front row.
"What a turnaround. It's a tribute to everyone in the team that we've taken such a massive step this weekend, and the car is feeling fantastic. We have a lot to do still, but it's very positive, the race is winnable from where I am and I plan on giving him the race of his life."
In contrast, Ferrari appeared to struggle throughout qualifying and, along with Michael Schumacher of Mercedes, both cars resorted to soft tyres - which warm up and find more performance more quickly - in Q1.
While Alonso planted his car firmly in the top 10 his team-mate Felipe Massa was clearly struggling and qualified in eighth.
The Spaniard said Ferrari had taken a very conservative approach to qualifying.
"We were not super-competitive today (compared to) practice," he said.
"We knew if we took a big risk we may be fourth, if we are safe, we go fifth or sixth, so no need to take risks in the first qualifying of the season.
"Position we are happy, distance from pole we are not happy, so we need to look at that overnight. Overall grip was where we lacked. We were not so bad yesterday, so we missed something today. I suspect this was not normal pace from us and we will get better and better tomorrow."