Chasing a modest 130 in a game reduced to 20 overs per side by rain, England were set for a historic triumph with 20 needed off 16 balls and Eoin Morgan and Ravi Bopara at the crease.
However, Morgan’s departure for 33 was the first of four wickets to fall for three runs in eight balls as the team were struck by nerves.
England finished on 124-8 after James Tredwell missed the last ball of the innings with six required for victory.
Off-spinner Ravichandran Ashwin claimed 2-14 and slow left-armer Ravindra Jadeja took 2-24 to complement his vital unbeaten 33 off 25 balls in India’s 129-7.
England are left to reflect on a fifth defeat in a major final – and another agonising loss in the Champions Trophy showpiece after losing to West Indies in 2004 – following the sort of woeful batting display that many thought had been consigned to the past.
A jubilant India, meanwhile, can add the Champions Trophy to the World Cup they won in 2011.
They – and the thousands of India fans among a sell-out crowd – also owe a debt of thanks to the International Cricket Council, which extended the finish time by more than an hour to allow the match to finish at 20:30 BST.
The manner in which England floundered against spin – two batsmen were stumped, albeit one, in Ian Bell, despite replays suggesting otherwise – took the gloss off a fine performance with the ball.
Bopara’s 3-20 was therefore in vain, while his dismissal for a punchy 30 – in what looked like being the game’s most pivotal innings – is likely to be remembered as part of a collapse that will be recalled for all the wrong reasons.
A fifth-wicket stand of 64 between Morgan and Bopara aside, England were rarely comfortable during a pursuit that was undermined when Alastair Cook edged Umesh Yadav to first slip in the second over.
Jonathan Trott, criticised for his strike-rate in this tournament, batted like he had a point to prove in making 20 off 17 balls, only to over-balance as he attempted to work Ashwin into the on side and Mahendra Dhoni completed a smart stumping off a leg-side wide.
Joe Root swept Ashwin to short fine-leg and Bell was stumped – replays suggested his foot was grounded – when he dragged his foot out pushing at man-of-thematch Jadeja, leaving England 46-4.
Bopara hit two huge leg-side sixes and Morgan one as they restored the balance of power, but the game changed in one remarkable over from the wayward Ishant Sharma.
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