Martinenghi was placed in lane 7 while pre-race favourite and world record holder Peaty was in lane 4 with Tokyo runner-up Arno Kamminga and Qin Haiyang on either side of him.
But when the race finished with the slimmest of margins, Martinenghi was 0.02 seconds faster than both Peaty and American Nic Fink, who shared the silver.
"I grew up with that goal in my mind, so to become Olympic champion today is a dream come true, next to Adam, one of my idols I grew up with," a beaming Martinenghi said.
"When I touched the wall and I saw the red light on the block, just one red light (to signify the winner), I said, 'I did it!' It's incredible.
"I was in my favourite lane, so nobody could see me, I was like in the shadows. I love to race in that way... The last 10 strokes I saw Nic next to me (in lane 6) and I said, 'OK, now let's fight, I'm ready to fight'."
Martinenghi said he grew in confidence when his coach told him earlier in the day that he would be in lane 7 for the final.
"That lane was good, it was wonderful, my favourite lane," he added.
"I've got a seven on my chain. He said maybe it's a sign, because when I was younger, I was training every day in the seventh lane."
Although the finishing time was more than two seconds off the world record, Martinenghi was just happy to have the gold medal around his neck.
"The time wasn't so fast for everybody, so we spoke to each other about it and I don't know what to say," the Italian said.
"But I don't care, I'm an Olympic champion. Today I was the fastest, so that's enough for me."
An emotional Peaty said he was "happy to pass the baton" to Martinenghi like 2012 Olympic champion Cameron van der Burgh did when the South African finished second behind the Briton in 2016.
"I've been racing him so long, just like I was racing Cameron," Peaty said.
"He was 29 when he moved on from the sport. That's sport, you pass the baton."