Second to the home turn as Scottish set a steady speed, Highland Reel was headed by Ulysees and Decorated Knight inside the final furlong.
With defeat staring him in the face, Highland Reel (9/4) summoned another effort and quickened again to go on and score by 1 1/4-lengths over Decorated Knight (10/1) with Ulysses (9/2) a head off third, all three by Galileo. (image GB Racing)
Queen's Trust came from last to finish fourth with Scottish staying on well in the home straight after leading until two furlongs to be beaten three lengths into fifth at his first start since finishing runner-up in last year's Caulfield Cup.
Jack Hobbs started the 2/1 favourite but was unable to quicken in the home straight after being held up and finished last of the eight runners after being eased down when beaten.
It is the first win of the meeting for O'Brien and his 300th Group or Grade I win on the flat or over jumps.
"What can I say? Unbelievable. Highland Reel has pace, courage, tactical speed - he's an amazing horse, he's concrete," O'Brien said.
"He has a super mind, a lot of class and unbelievably brave. He's passed all the tests all the way, he has everything.
"We were thinking if everything went well here we'd look at the King George again back here next month but the lads will work that out."
Third behind Winx and Criterion in the 2015 Cox Plate, Highland Reel finished runner-up in the Group II Hardwicke Stakes at this meeting last year but has since won three Group Is around the world including the King George VI and Queen Elizabeth Stakes.
Highland Reel has now won six times at Group I level and Ryan Moore was full of praise for the five-year-old.
"Highland Reel has been everywhere and he keeps coming back. I'd say that's probably a career-best for him," Moore said.
"He's so tough, he's got a marvellous attitude, so many came at him there."
Highland Reel is from Australian bred Group I placed Danehill mare Hveger, a full sister to champion galloper Elvstroem and half-sister to Royal Ascot Group I winner and champion miler Haradasun from Group I AJC Australian Oaks winner Circles of Gold.
She was sent to the Northern Hemisphere in 2009 and is also the dam of Group II winner Idaho, who was placed in the Epsom Derby and Irish Derby last year.
Hveger has gone to Galileo in each year at stud in the Northern Hemisphere and has a three year-old filly, two year-old filly and yearling colt to follow, all by the Coolmore champion who turns 20 next year.
Coolmore have one son of Galileo on their Australian roster for this spring in Cox Plate hero Adelaide (IRE), who stands at a fee of $11,000.