The clash between world number 1 Hingis from Switzerland and Californian number 2 Davenport was a thriller in which Davenport came within two points of victory in the final set.
"We tried our hardest, I'm glad I could come back and make it great match," said Davenport.
"We've played a lot of finals. "I hope in two weeks we'll be doing it again at the Australian Open. Congratulations to Martina for pulling it out in the end and having such a tremendous week."
Australian Lleyton Hewitt broke open the men's final match midway through the first set to roll past top seed Magnus Norman 6-4, 6-1 for a second straight trophy in Sydney.
Hewitt, 19, dominated after taking charge against the Swede, winner of five titles last season. Hewitt now goes into next week's Australian Open with a major boost of confidence after remaining undefeated at the Olympic venue of Homebush Bay.
Hingis looked like whipping to a straight-sets win over Davenport in the pair's 22nd meeting (now 12-10 Davenport). But the wheels temporarily fell off of the 20-year-old's game as she led by a set and 4-2.
Hingis lost her final two service games of the set as Davenport claimed back into contention in a hot day of 30 C temperatures.
The usually calm Hingis showed a flash of emotion in the closing stages of the second, smashing a racket frame into oblivion and earning a warning.
The third set stayed tight until three-time Australian Open winner Hingis got her second wind. The Swiss held firm when Davenport stood two points from the title in the tenth game.
Hingis held 5-all to level, then broke for 6-5 after Davenport brought on three break points with a costly eighth double-fault. Hingis took the trophy on the second of three match points a game later from Davenport's 76th unforced error of a long afternoon.
"It's finished," said a relieved Hingis. "I need some rest until the Open. I'm sorry you had to suffer out there for two hours, but we played a great match.
"I hope there are many more times like today."
Hingis took her trophy from Australian Olympic swimming hero Ian Thorpe, wearing one of the player's new one-armed shirts.
"I hope to be back many more times," said Hingis. "This is one of my favourite towns in the world."
After winning the combative opening set, Hewitt poured on the pressure in the second, racing to 5-0 before Norman managed to earn a game. The Aussie watched as a return by the Swede sailed long over the baseline on first match point.
Hewitt now stands 7-4 in finals and is the only player to take Sydney twice besides Americans Pete Sampras and Todd Martin.
Hewitt is making Australian wins a habit. A year ago, he went into the Aussie Open with Adelaide and Sydney titles to his credit.
The teenager said the victory was especially sweet after losing a month ago at the Davis Cup final in Spain.
"Not so long ago I was in Barcelona and had about 14,000 people booing me and throwing things at me whenever I walked on court," he said.
Norman has made a nice recovery from a Christmas illness and an opening loss a week ago in India.
He admitted: "It was Hewitt's day today. He's a tough opponent. I wish him good luck next week in Melbourne."
The men's and women's event set a minor tennis record as the only event in the post-1968 Open tennis era where the top two seeds had disputed all four finals (singles and doubles).
(dpa)