Hamilton, the 32-year-old CSC team leader who has been riding with a shoulder injury since the second day, came over the line alone after five hours of racing over the final mountains stage to move up one place to sixth in the overall standings.
Just before approaching the finish, the American signaled for his team car to come forward, and when it did, he shook manager Bjarne Riis's hand for a long time before riding over the line with his arms in the air.
It is CSC's third stage win of the race following wins for Spaniard Carlos Sastre and Dane Jakob Piil -- and makes up for the difficulties the team has encountered due to Hamilton's morale-busting injury.
"It's incredible. It was a difficult stage and at the beginning I didn't feel so good. All credit to my team," said Hamilton before dedicating his victory to his CSC teammates.
"At the start of the stage the peloton split and I found myself at the back but they (CSC) dropped five riders to help me get back to the front. So I want to dedicate this victory to them."
Just under two minutes after he crossed the finish line, Germany's Erik Zabel fired over in second place after the mass sprint to the line for points for the green jersey.
Lance Armstrong, the US Postal team leader who lives in the same building as Hamilton -- a former US Postal rider -- retained the yellow jersey after arriving with the main peloton.
Armstrong, whom Hamilton helped win three of his Tour titles, was one of the first people to congratulate Hamilton on his first Tour win, hugging his friend, rival and neighbor from the Spanish city of Girona.
"It's a big day," said Armstrong as he stood next to his ex-teammate.
"Tyler's still a great friend and he's also a close neighbor. It's great for him."
The 31-year-old Armstrong's main rival, Germany's Jan Ullrich, is still in second overall at 1min 07sec following a tricky stage which took its toll on some of the more fragile members of the peloton.
Hamilton was one of those who found the going tough earlier in the stage, where the first hour was raced at a rapid 48kph.
He began the stage at the back of the group but by the time of the day's first main climb, the 1,540-meter Col du Soudet at the 67.5km mark, he had moved back to the front.
The American, who had been tipped for a top-five finish in this year's centenary Tour, then went on the attack and by the second main climb of the day, the Col de Bagarguy, had built a significant lead of 2min 39sec lead over a small group of pursuers and 4:20 on the main peloton.
Hamilton persisted with his attack and despite attempts at counter-attacks by the Fassa Bortolo and Euskaltel teams -- both of whose overall standings were being threatened by the American -- they never managed to make up the ground.
"I knew I had to give everything," added Hamilton, whose best previous result on the Tour was a second place in a time trial in 1998 -- on the day the Festina doping scandal hit the headlines.
"I knew if I could build a lead of five minutes over the group it might break their morale, and I think it did."
Armstrong, meanwhile, had a relatively easy day in the saddle, with teammate George Hincapie playing a major role in controlling the pace of the peloton at the front.
"It wasn't an easy day," added Armstrong. "It was really humid and sticky but our team were incredible today with George controlling things pretty well at the front."
For the moment Armstrong seems content not to try and build his lead over 1997 Tour winner Ullrich and to wait until Saturday's time trial on the penultimate day of the race.
Thursday's 17th stage will see the peloton return to flat ground where the fight for the points competition's green jersey -- currently being worn by Australian Baden Cooke -- will recommence.
Stage 16 results, top 15 (Pau - Bayonne, 197.5 km)
1. Tyler Hamilton (USA/CSC) 4hr 59min 41sec
(average: 39.542 kph)
2. Erik Zabel (GER/TEL) at 1:55
3. Yuriy Krivtsov (UKR/DEL) 1:55
4. Luca Paolini (ITA/QST) 1:55
5. Gerrit Glomser (AUT/SAE) 1:55
6. Bram De Groot (NED/RAB) 1:55
7. Markus Zberg (SWI/GRL) 1:55
8. Sandy Casar (FRA/FDJ) 1:55
9. Fabrizio Guidi (ITA/BIA) 1:55
10. Stuart O'Grady (AUS/C.A) 1:55
11. Christophe Mengin (FRA/FDJ) 1:55
12. Andy Flickinger (FRA/A2R) 1:55
13. Salvatore Commesso (ITA/SAE) 1:55
14. Nicolas Portal (FRA/A2R) 1:55
15. Serge Baguet (BEL/LOT) 1:55
Stage 16 overall standings, top 15
1. Lance Armstrong (USA/USP) 70hr 37min 59sec
2. Jan Ullrich (GER/BIA) at 1:07
3. Alexander Vinokurov (KAZ/TEL) 2:45
4. Haimar Zubeldia (SPA/EUS) 5:16
5. Iban Mayo (SPA/EUS) 5:25
6. Tyler Hamilton (USA/CSC) 6:35
7. Ivan Basso (ITA/FAS) 8:08
8. Christophe Moreau (FRA/C.A) 11:12
9. Francisco Mancebo (SPA/BAN) 16:05
10. Carlos Sastre (SPA/CSC) 16:12
11. Denis Menchov (RUS/BAN) 17:09
12. Georg Totschnig (AUT/GRL) 18:52
13. Manuel Beltran (SPA/USP) 19:34
14. Richard Virenque (FRA/QST) 22:00
15. Roberto Laiseka (SPA/EUS) 24:34