The turning point came at the par-4 16th, where Lara made birdie and Pagunsan faltered to a bogey.
Lara went on to par the final two holes for a 1-under 69 to claim his first European Tour title at 15-under-par 265. He became the first player in tournament history to go wire-to-wire for the victory.
'I can't tell you. It is amazing. Winning in these conditions when I didn't have my best day was tough,' stated Lara. 'I finished really good the last few holes. I am really, really happy about it.'
Pagunsan got up and down for par on the final two holes to close a 2-under 68 that left him one back at minus-14.
Jeev Milkha Singh and Jyoti Randhawa each posted 4-under 66s in the final round to tie Thongchai Jaidee (67) in third place at 12-under-par 268.
Miguel Angel Jimenez, the 2005 champion, shared sixth place with Soren Kjeldsen at minus-11.
Early on, it looked as though Lara was going to coast to victory. He birdied the third for the fourth straight day to move to 15 under. He was three ahead of Pagunsan, who bogeyed the second and birdied the third.
However, Pagunsan closed the gap with a 7-foot birdie putt on the fourth at Hong Kong Golf Club. Lara's lead dropped to one when he could not get up and down for par on the seventh. That was his first bogey since his final hole in Friday's second round.
Lara hit a poor bunker shot on the ninth and that led to another bogey that dropped him into a share of the lead with Pagunsan at 13 under.
Pagunsan, a 28-year-old rookie, sank a 3-foot birdie putt on the 11th to take his first lead of the event. The Filipino made a poor decision on the par-5 13th though.
He landed in a fairway bunker and tried to play a fairway-wood from the bunker. Pagunsan's second shot hit the lip of the bunker and his ball tumbled into the fairway. After finding the green with his third, he two-putted for par.
Meanwhile, Lara was in the middle of the 13th fairway and found the putting surface with his second. He two-putted for birdie to grab a share of the lead at minus-14.
Pagunsan responded with a 15-foot birdie putt at the 14th to regain the lead. The 16th proved to be his downfall though. His tee shot ended in the left rough near a small tree. Pagunsan tried to punch a low shot under the tree and down the fairway.
However, he hit the shot fat and left it in the rough. Pagunsan's third found a greenside bunker. Lara, again in the middle of the fairway, knocked his approach to 12 feet. Pagunsan blasted his fourth to 2 feet.
Lara rolled in his 12-footer for birdie to get to 15 under before Pagunsan tapped in his bogey putt that left him at 14 under.
'The thing is, the guy a played with today (Pagunsan), he played so good. He's a really good putter. He knows the greens very well,' Lara admitted. 'I see that. When I lost the lead, I was thinking about trying to get here (into the winner's circle). He missed on 16 and I made birdie and that gave me the victory.'
Lara calmly two-putted for par on the final two holes, while Pagunsan needed to get up and down for par on 17 and 18 to finish at minus-14 and take second place in his first European Tour start.
'He opened the door and I went straight in,' Lara said. 'He gave me the only chance to have it and I took it. I made birdie at the right moment and then hit a really good putt on 18.'
Pagunsan hurt his own cause in the final round as he hit just eight of 18 greens in regulation.
Francesco Molinari closed with a 4-under 66. That gave him a share of eighth place at 10-under-par 270 where he was joined by Alejandro Canizares (67) and Jean Van de Velde (68). Gregory Bourdy took 11th at minus-nine, while Andrew Buckle was one stroke further back at 8-under-par 272.