Northern Ireland's McDowell denied the 14-time major champion a lone tournament title in a 2010 season marked by personal turmoil off the course and struggles with a swing change on the course.
Woods, who had let slip a four-shot lead, appeared poised to seize the victory at the 72nd hole when he put his approach shot three feet from the pin.
But McDowell drained his own 20-footer for birdie to send the unofficial event hosted by Woods to a playoff.
Returning to the par-four 18th for the playoff, McDowell then made another 20-footer for birdie while Woods just missed his own 15-footer.
"They were the stuff of dreams - 2010 has been the stuff of dreams, really," McDowell said.
McDowell's triumph left Woods without a victory since the 2009 Australian Masters.
McDowell carded a three-under 69 for 272 while Woods shot a two-over 73.
England's Paul Casey was third in the 18-man field after a 69 for 276.
The defeat marked the first time in his professional career that Woods lost a tournament when he led by three or more shots after 54 holes.
"I was aware he was a pretty damn good closer," McDowell said. "It's a pretty special feeling to go out there four back and do the job."
McDowell improved on his runner-up finish in this event last year, when he was a last-minute replacement for Woods - who opted out of his own event as he was engulfed in a sex scandal that eventually ended his marriage.
Woods didn't open his 2010 season until the Masters in April, and for the first year since he turned pro failed to notch a US PGA Tour victory.
The drought saw him toppled from the number one world ranking in November after five years at the top.
Despite the defeat, Woods said he was encouraged by his week and proud of his battling final round.
Woods got off to a stuttering start, three-putting two of the first three holes.
McDowell seized a two-shot lead at the par-five 13th, as he birdied and Woods took double-bogey.
Woods hadn't trailed all week until that three-shot swing at 13, where he was left off the tee and had to punch out into the fairway. His approach went through the green, and his chip back went through the green. From there he left himself a seven-footer and missed for a double-bogey.
The fact that he could regroup and challenge for the victory at the end was a source of pride for Woods, who prior to this week had topped a leaderboard just once this year, sharing the lead after the first round of The Barclays.
"Today, even though I lost and made countless mistakes in the middle part of the round, it said a lot for me to come back and put my swing back together again," Woods said.
"I haven't done that yet, and I haven't done it down the stretch when I needed it the most.
"That's exciting for me to know that it was there when I needed it."
Sunday's final round was a virtual match-play showdown between Woods and McDowell.
McDowell set the stage for the final hole of regulation and the playoff with a remarkable bogey at the par-three 17th.
Leading by one, he pulled his tee shot into deep, dry grass, took an unplayable lie and took his penalty drop on the 18th tee.
McDowell kept his losses to a minimum with a seven-foot bogey putt as Woods missed his birdie attempt and they went to the 18th tied.
After playing alongside Woods for two days, McDowell was in no doubt that the former world number one would soon be back to his old dominant form.
"He'll be back winning tournaments in 2011," McDowell said.