Doolan ended the event at 18-under-par 270, while Sorenstam closed with a 1-under 71 to finish the event, which she had won twice previously, at minus-17.
Lorena Ochoa carded her fourth round in the 60s to close at 16-under-par 272. Karen Stupples, who at one point moved into second place during the final round, finished at minus-15 after a final-round 70.
Doolan used a remarkable run of golf midway through her round to vault to the top of the leaderboard. She began her round with five straight pars to remain at 11 under before catching fire.
The 35-year-old dropped in a birdie putt at the par-4 sixth. She came right back with a 2-foot eagle at the par-5 seventh at Evian Masters Golf Club to jump to minus-14.
Doolan kept rolling with a birdie at the eighth from 6 feet out. The three-time LPGA Tour winner converted an 8-footer for eagle at the par-5 ninth.
She capped the remarkable stretch with an 8-foot birdie putt at the 10th. In five holes, she picked up seven strokes to jump to 18 under.
Doolan did have eight holes to play still and it wasn't easy. She dropped a stroke at the 12th, but erased that error with a birdie at the 15th. The Australian dropped another stroke on 16, but two-putted for birdie at the par-5 closing hole for a one-stroke win.
'I knew I had it in me to make a lot of birdies on this course,' said Doolan, who earned $375,000 for the win. 'There were a lot of birdies and eagles there in a few holes and I'll cherish that for a long time. Every win is a special win and that's why we're are out here practicing hard each week and when it came down to it, I made the putt that matters.'
Sorenstam, the third-round leader, extended her early lead to three shots with a birdie at the par-4 fourth. Things took a turn for the worse for the top player in the women's game though.
The Swede bogeyed the sixth and eighth to fall two strokes behind Doolan. Sorenstam tried to fight back with a birdie at No. 10, but more trouble loomed.
She faltered to a bogey at the par-4 13th and another at the par-5 15th. However, she showed her mettle with a late run. Down by four shots, Sorenstam began to close in on Doolan with a birdie at the 16th and got even closer when she birdied the par-3 17th.
Standing on the tee at the par-5 18th, Sorenstam needed to make eagle to force a playoff. She reached the par-5 in two shot, but her eagle putt from 35 feet out just missed. She tapped in for birdie, which put her one stroke behind Doolan for her 37th second-place finish in her LPGA Tour career.
'I was a little surprised when I got to the ninth hole and saw Wendy at 17 under,' said Sorenstam, who will defend her crown at the Women's British Open next week. 'I knew she must have made eagle or something, but there weren't many cheers out there. I figured someone would do something out there today and I was kind of hoping it was going to be me.
'I gave it my all, but today I made a few mistakes and didn't play as well as the first three days. This is a big tournament for me and I'm disappointed and it goes to show there are a lot of good players out there and the golf is getting better and better so I have to keep sharp.'
Laura Davies, who matched the course record of 64 in the opening round, closed with a 1-under 71. She finished alone in fifth place at 10-under-par 278.
Juli Inkster, the 2003 champion, fired a 3-under 69 in the final round to share sixth place at 9-under-par 279. She was joined there by U.S. Women's Open champion Meg Mallon and Hee-Won Han.
Amateur star Michelle Wie battled back from a poor third round to finish with a 3-under 69. She ended the event tied for 33rd place at 1-under-par 287.