Kite came to the last hole level with the Argentinian Angel Cabrera but then struck a 110 yards sand wedge just 18 inches from the pin and rolled in the putt for a winning birdie three.
It gave the American a round of 70 for a 72-hole aggregate of 273, 15 under par, while Cabrera, the overnight leader, shot 72 for 274.
Seve Ballesteros, the European Ryder Cup captain, was third, equalling the best round of the day with 69 for 276.
Yet despite Kite's success for his first tournament victory since February, 1993, Cabrera - a rookie on the European Tour - must be kicking himself for failing to win.
Cabrera, who shot a course record 62 yesterday, was one shot ahead of Kite with two holes to play and had victory in his grasp. But he took three putts on the short 17th to allow the American to draw level and then came Kite's superb finish.
Even then Cabrera might have forced a play-off as he had a six-foot putt for a birdie at the 18th but the ball rolled agonisingly just wide of the hole.
"I hadn't won for such a long time that I was beginning to wonder whether I would ever win again,'' Kite said. "I know there were a lot of good guys playing in the Dunhill Cup this week but here in Madrid we had a quality field.''
After three glorious days the weather completely changed with strong winds and driving rain not helping the players in the closing holes.
Ballesteros, last but one out, played a masterly round in the circumstances. He had five birdies in his first 12 holes, including getting a par five at the 11th after going into the water.
"That penalty shot at the 11th proved the turning point. I began today five shots behind the leader and when I went out in 33 to close to one shot I thought I would win. But it was not to be," the Spaniard said.
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