Peaty had never before lost a major final in his favoured event and looked set for a three-peat as the champion at Glasgow 2014 and on the Gold Coast four years ago unsurprisingly led at the halfway point.
But he lost momentum in the closing stages and was reeled in by Wilby, who clocked 59.25 seconds at the Sandwell Aquatics Centre, just over an hour's drive from where Peaty grew up in Uttoxeter.
To worsen matters, Zac Stubblety-Cook finished second in 59.52secs while fellow Australian Sam Williamson took bronze in 59.82s, 0.04 ahead of fourth-placed Peaty.
Peaty was making his comeback after suffering a broken foot in May, leading to him missing last month's World Championship, and his time of 59.86 was just under two seconds slower than his personal best.
"I don't know what went wrong," he said. "With 25m to go I had nothing in the tank. Maybe that's overexposure on the foot. Sometimes you just have a bad race, I can't pinpoint where I went wrong.
"It was a slow final, I can't remember the last time I went that slow. It just didn't go right. Of course I'm disappointed, but that's what makes you go faster next time.
"I chose to fight, I don't really care about the stats or how long you're undefeated. Every time I get on to this box, I'm willing to fight and race anyone in the world.
"I've kind of lost that spark, whether it's with my foot, but I'll be looking to find that over the next months and into the next two years."
While Peaty missed out, England still capped a memorable day on the sporting front with top spot on the podium as Wilby went one better than 2018.
Wilby, who admitted he was considering his swimming future after a disappointing Olympic campaign, said: "It is certainly up there as a special moment that I'll remember forever.
"It just sums up to me enjoyment and having that fun back in the sport is everything. We've all seen faster times than that, but I'm loving it and that's got me to the top of the podium this time.
"Everything else doesn't matter. I'm always going to have that medal, I'm always going to love looking at it and remembering the moments that brought it here."
Wilby is certain Peaty will bounce back, adding: "He's the fastest breaststroker in the world and you can't take that away from him. This moment, I was getting that little edge on him and I'm sure he'll be kicking me in the a** later in the swimming calendar."
Alice Tai was another English gold medallist on Sunday night, prevailing in the women's 100m backstroke S8 final, just a few months after having her right leg amputated below the knee.
"It's a bit surreal," she said after coming home in a time of 1min 13.64s, with Wales' Lily Rice finishing third.
"I started and ended last season with surgery, pulled out of Tokyo, then had an amputation in January. I've been learning to walk this year and getting back in the pool was just a bit of fun as I missed swimming."
James Guy picked up bronze in the men's 200m butterfly final, where Chad le Clos' silver took him to 18 Commonwealth Games medals, equalling the overall record held by shooting pair Michael Gault and Phil Adams.
Wales' Medi Harris was a bronze medallist in the women's 100m backstroke, while the quartet of Freya Colbert, Tamryn van Selm, Abbie Wood and Freya Anderson also finished third in the women's 4x200m freestyle relay final.