Triple jumper Olsson was almost half a metre better than second-placed Nathan Douglas of Britain with a leap of 17.67, the best in Europe this year.
The 26-year-old received a standing ovation as he went on his lap of honour around the stadium where as a boy he watched Jonathan Edwards set the world record of 18.29 11 years ago.
It was just reward for Olsson, who has had a torrid time with a foot injury that required four operations since winning the Olympic title in Athens two years ago.
"I believe any athlete who gets to compete at home knows how much this means. To compete in front of family and friends, that made it so important for me," Olsson told reporters.
Cheered relentlessly, Olsson won the competition with his second jump as no one else looked like getting close.
Douglas took the silver with 17.21, three centimetres more than Romania's Olympic silver medallist Marian Oprea.
TRIPLE CROWN
Isinbayeva completed her triple crown, adding the European pole vault title to her world and Olympic ones but the weather thwarted her attempt to break her world record of 5.01.
Most of the crowd remained to cheer Isinbayeva as she bravely attempted a best of 5.02 in the rain and the athlete gratefully saluted them afterwards.
"Now I have a full collection of gold medals," said the peerless 24-year-old, who took the silver four years ago.
"It was difficult to jump in the rain, but the spectators supported us. They were great. I think in better weather I would have jumped the world record."
Isinbayeva finished the competition on 4.80 ahead of Poland's Monika Pyrek and Russian Tatyana Polnova, both on 4.65. Defending champion Svetlana Feofanova of Russia missed out on a medal in fourth.
Alesia Turava gave her family their second European championship gold as Belarus won three on the penultimate day of competition.
Turava, older sister of women's 20km walk champion Ryta, won the inaugural women's 3,000 metres steeplechase final, punching the air as she crossed the line in 9:26.05.
"Yes, we are a good family. My sister won the walk, I won the steeple," said Turava.
"But I must tell you I did not watch her race. I do not like to watch my sister, it is too much tension."
THROWING MEDALS
Belarus's other medals came in the throws as Natallia Khoroneko edged compatriot and world champion Nadzeya Ostapchuk to the women's shot put title by one centimetre and Ivan Tikhon won the men's hammer.
World indoor champion Khoroneko took the lead in the fourth round with 19.43 metres. It was only the second time in 40 years that a throw of less than 20 metres has won.
Tikhon found his form for his first win of the year with a season's best throw of 81.11 metres in the hammer.
Finland's Olli-Pekka Karjalainen prevented another Belarus one-two, with 80.84 metres and world silver medallist Vadim Devyatovski was third.
Latvia celebrated their second European gold in history and their first since the opening championships in 1934 when Stanislav Olijar cruised to victory in a 110 hurdles final missing world champion Ladji Doucoure, who failed to qualify after aggravating a calf injury.
Lithuania's Virgilijus Alekna maintained his unbeatable run to take his first European title with 68.67 in the men's discus. The two times world and Olympic champion is unbeaten in 18 competitions stretching back a year.
Spain's Marta Dominguez retained her 5,000 title and Germany's Ulrike Maisch won the women's marathon.
