Spurred on by the capacity partisan crowd, the third seed from Yorkshire led after the first and third games - but the experienced fifth seed Palmer romped to a 5-1 lead in the fourth, then a 4-1 lead in the decider before taking the match in 78 minutes.
"I'm so envious for players like James having the British Open and now the World Open here - we don't get tournaments like this in Australia." said the two-time champion from Lithgow in New South Wales. "That felt like a final. I can't imagine playing in front of a home crowd like this!"
"Perhaps he was under pressure. The key for me was the start of the fourth and fifth games.
"As I said at the British Open, he'll win that title one day - and he'll come back to win this one too," added the former world number one.
Willstrop was devastated by the loss: "He was awesome tonight - in those last two games he was better than me by a good distance.
"It was the most calm performance I've seen from him. He handled the pressure well.
"He's a smart guy," added the England number one. "He's managed to stay in excellent condition. I felt more in control in the British Open final."
Palmer will now meet Karim Darwish, the No7 seed who beat England's Adrian Grant 12-10 11-7 11-7 in 47 minutes.
Defending champion Amr Shabana was in stunning form to beat compatriot Mohamed El Shorbagy, a 17-year-old qualifier, 11-2, 11-3, 11-6 in just 20 minutes.
In one of the most exciting 'draws' in squash, the world number one will face his country's newest star Ramy Ashour, the 21-year-old fourth seed 2-11 11-8 11-9 11-7 in 58 minutes.
[1] Amr Shabana (EGY) bt [Q] Mohamed El Shorbagy (EGY) 11-2, 11-3, 11-6
[4] Ramy Ashour (EGY) bt [8] Nick Matthew (ENG) 2-11, 11-8, 11-9, 11-7
[5] David Palmer (AUS) bt [3] James Willstrop (ENG) 5-11, 11-5, 9-11, 11-4, 11-5
[7] Karim Darwish (EGY) bt [14] Adrian Grant (ENG) 12-10, 11-7, 11-7
Issued by iSPORTmedia

After narrowly losing to David Palmer in the final of the British Open in May, Englishman James Willstrop failed in his bid for revenge when he went down to the Australian 5-11 11-5 9-11 11-4 11-5 in the men's quarter-finals.