Opener Shane Watson scored a career-best 161 not out as Australia pulled off the highest successful run-chase at the MCG in one-day international cricket history.
In the first match of the 7-match series England scored 294 with Kevin Pietersen making 78 in his comeback game to the ODI side, Brad Haddin missed three stumping chances.
Australia replied with 297 for 4 as Watson thrilled the crowd with a six, his fourth of the innings, on the first ball of the final over to kill off England's hopes.
Watson hit 12 fours and faced 150 deliveries in a stunning display, his fifth ODI century.
Veteran Mike Hussey, who scored 21 for Australia at No.5, appeared to strain a hamstring while batting in a shocking piece of timing ahead of next month's World Cup on the sub-continent.
Watson, who is tipped to claim his second successive Allan Border Medal next month as Australia's player of the year, shared century partnerships with Brad Haddin (39) and Michael Clarke (36).
With World Cup spots on the line just three days before the 15-man squad is due to be announced, Australia bowled poorly at times and missed six chances in the field.
The next match is in Hobart on Friday.