The 23-year-old clocked 55.53 seconds, a new championships record, just 0.05sec from her own world record set at the Rio de Janeiro Olympics last year.
She is the first reigning Olympic champion to add the world title in the event.
Australia's Emma McKeon took silver at 0.65sec back with Kelsi Worrell of the United States taking bronze at 0.84.
Sjöström broke the 100m freestyle record on Sunday, in the women's 4x100m relay, when she became the first woman to swim under 52 seconds.
READ ALSO: Sarah Sjöström makes history with new record
Her victory in Budapest mirrors her 2009 success as a 15-year-old when the world championships were held in Rome.
She failed to defend the 100m fly title in 2011 in Shanghai, but took gold at both the 2013 championships in Barcelona and two years ago in Kazan.
The Swedish sprinter admitted feeling jaded after her freestyle world record on Sunday, but had been eager to get back in the pool.
“I'm very happy with this gold, I didn't know what to expect today, as I was a bit tired after four races yesterday on the first day,” she said,
“It was a bit hard to know what to expect, I was very excited before the race and I couldn't wait to start.”
“I felt like the last 10 minutes before the race were going on forever,” she joked.
Sjöström admitted she had no idea she was so close to her own world record.
“I was very surprised to see I was so close to the world record,” she said.
“It felt like I was going a bit slower than I did yesterday (in the freestyle relay), so maybe butterfly is about being relaxed then you can go even faster.”
“With these times in the first 50 metres in the 100 fly I feel very excited for the 50 flys later this week and also for the 50 free.”