Narang shot 103.1 in a gripping ten-shot finals for an aggregate of 701.1 after scoring 598 in the qualifying round in which also he stood third.
The gold was won by Romania's Moldoveanu Alin George who tallied 702.1, that included 103.1 in the final, to upset world number 1 Niccolo Campriani of Italy who stood second with 701.5 at the Royal Artillery Barracks.
After a good start when he shot 10.7, Narang was off target with his second shot that fetched him 9.7. But he gathered his wits and steadied his aim to collect 10.6 10.7 10.4 and 10.6 in the following four shots to at one stage remain on course for bagging even a silver.
However, he slipped a bit and had to fight for the bronze medal with China's Wang Tao who finished fourth with 700.4.
After returning poor scores of 9.9 and 9.5 in the seventh and eighth attempts, Narang pulled up his socks to seal the bronze with impressive scores of 10.3 and 10.7.
Narang's compatriot and defending champion Abhinav Bindra had, however, suffered a shocking exit with his dismal show in the preliminaries in which he stood 16th out of 47 contestants with a score of 594 out of 600.
Narang's bronze medal is only the third in shooting on the planet's biggest sporting event after Rajyavardhan Singh Rathore's silver in double trap in Athens 2004 and Bindra's gold in the last Games at Beijing.
This was also India's eighth individual medal in the Olympic Games.
After rifle shooter Gagan Narang gave India its first 2012 Olympics medal in London on Monday, his elated father BS Narang said this victory will boost his morale to win more medals.
"If he calls me, I will congratulate him and tell him to do well in the next two events. He still has two more events left on August 3 and 6 (50m Rifle 3-Position & 50m Rifle prone). He should concentrate on those two events," senior Narang stated in a composed manner as mediapersons jostled for some sound bytes at their residence in Hyderabad.
With Alin George and Campriani able to maintain their grip on the top two positions, the competition for the bronze medal had boiled down to a tense contest between the Indian and his Chinese rival over the last few shots in which Narang prevailed.
There was stage when Campriani's poor efforts of 9.9 and 9.4 in the eighth and the penultimate series gave Narang a whiff of chance of winning the silver, but the Italian fired a 10.4 in his last shot to dash the Indian's hope of finishing second.
Earlier, Narang had kept alive India's hopes by advancing to the medal round after Bindra crashed out.
Bindra, who scripted history four years ago by becoming the country's first-ever individual gold medallist in the Olympics, shot 594 out of 600 to finish a shocking 16th out of 47 competitors and lost the golden chance of becoming the world's first shooter to win two successive gold medals at the mega event.
However, Narang kept India in the hunt by finishing third with 598, a point behind Campriani and Alin George who both shot an Olympic record-equalling 599 to stand first and second in the qualifying round.
Narang was bang on target from the beginning, scoring two successive 100s, but a 98 in the third series somewhat let him down.
The 29-year-old Hyderabadi, however, kept his cool and fought his way back into the reckoning for the medal round with a perfect 100 in the fourth series and then clinched the spot as the third best performer by notching two more 100s in his last two rounds.
Narang, a two-time world record setter, had won four gold medals in the 2010 Delhi Commonwealth Games and followed that up with two two silver in the Guangzhou Asian Games a month later.
He had also won four yellow metals at the 2006 Commonwealth Games in Melbourne.
Bindra, on the other hand, started with two 99s in the first two series before coming back strongly by getting two perfect 10s for consecutive 100s in the third and fourth rounds.
The two 100s gave Bindra the lift and the belief he badly needed after dropping a point each in the first two sets.
However, a 99 in the fifth and an even poorer outing in the last series where he could score just 97, dashed Bindra's chances of earning a berth in the eight-man finals.
This was the only event the 29-year-old Bindra from Chandigarh was taking part in, thereby cutting short his campaign in the ongoing Games.
Narang will be competing in two more events at the Games.