Le Clos, third at the final turn, relentlessly tracked in Phelps and pipped him with a last-gasp surge to take the win in 1min 52.96sec.
Phelps, who had led at every turn in a quest to become the first man to win the same Olympic swimming event at three successive Games, was just five-hundredths of a second back in 1:53.01.
Phelps’ silver medal took him level with Soviet gymnast Larisa Latynina as the most decorated Olympic athlete of all-time with 18 medals, which he subsequently bettered in America’s 4x200m freestyle relay win later in the day.
It was an emotional visit to the podium for 20-year-old Le Clos, who is also the Commonwealth Games champion in the event.
Tears welled in his eyes as the South African national anthem was played as he stood beside his long-time hero Phelps and Japanese bronze medallist Takeshi Matsuda.
It was South Africa’s second gold medal in the pool after Cameron van der Burgh’s win in the 100m breaststroke.
“This is a dream of mine, I have always said Michael Phelps was my hero,” le Clos said.
“I wanted to be in the final for my main event, I achieved that goal and my coach said you have done all you have to do.
“But I just remember sitting in the call room thinking that Michael Phelps has never lost this race for 10 years in international meets.
“I remember turning in the last 50 and just looking at him underwater and realising this is my hero, it’s crazy.
“I can’t describe how I felt. In the last 25 metres I can’t explain what came over me.”
Phelps had been untouchable in the 200m fly at major events. He owns the four fastest times in history and his world record of 1min 51.51sec is more than one second faster than the second-best performer in history.
Le Clos added that he had been receiving plenty of support from South Africa.
“I am really proud I had the nation behind me and after Cameron’s win, it has lifted up the sport,” he said.
“I have been getting a lot of messages from back home. I am shocked by how many people seem to know me back home now.
“I’ll have to try and defend my title in four years’ time, but to beat Michael Phelps is something I have wanted my whole life, it is exactly what I have been dreaming off since I was 12.”
Michael Fred Phelps II, 27, is the most decorated Olympian of all time with 19 medals. Phelps also holds the all-time records for gold medals (15) and gold medals in individual events (9). Phelps’ total of 19 Olympic medals is one more than the 18 won by Soviet gymnast Larisa Latynina. He is the current individual long course world recordholder in the 100 metres butterfly, 200 metres butterfly and 400 metres individual medley as well as the former long course world recordholder in the 200 metres freestyle and 200 metres individual medley.
Phelps holds the record for the most gold medals won in a single Olympics; his eight at the 2008 Beijing Games surpassed American swimmer Mark Spitz’s seven-gold performance at Munich in 1972. His five gold medals in individual events tied the single Games record set by compatriot Eric Heiden in the 1980 Winter Olympics and equaled by Vitaly Scherbo at the 1992 Summer Games. He has twice equaled the record eight medals of any type at a single Olympics achieved by Soviet gymnast Alexander Dityatin at the 1980 Moscow Summer Games. He won six gold and two bronze at Athens in 2004 and eight gold at Beijing in 2008, winning more medals than any other athlete in either of those Games. So far, in the 2012 Summer Olympics, Phelps has won two silver medals and one gold.
Phelps’s international titles and record-breaking performances have earned him the World Swimmer of the Year Award six times and American Swimmer of the Year Award eight times. He has won a total of sixty-six medals in major international competition, fifty-four gold, nine silver, and three bronze spanning the Olympics, the World, and the Pan Pacific Championships. His unprecedented Olympic success in 2008 earned Phelps Sports Illustrated magazine’s Sportsman of the Year award. The same magazine said that he is “universally recognized as the greatest swimmer in history”.
After the 2008 Summer Olympics, Phelps started the Michael Phelps Foundation, which focuses on growing the sport of swimming and promoting healthier lifestyles. As a participant in the US Anti-Doping Agency’s “Project Believe” program, Phelps is regularly tested to ensure that his system is clean of performance-enhancing drugs.