Vettel set a new track record with a 1:16.276s, with was 0.168s faster than Finn Raikkonen could manage in the shootout session.
Mercedes had secured pole in the last four years in Hungary, but that run was ended as Valtteri Bottas could only manage third on the grid, 0.254s down on Vettel.
A mistake from Lewis Hamilton and vibrations from his tyres restricted him to fourth, as Red Bull locked out the third row, Max Verstappen pipping Daniel Ricciardo.
Nico Hulkenberg was seventh quickest for Renault, but will drop five places for a gearbox penalty, as McLaren will start from the fourth-row, with Fernando Alonso ahead of Stoffel Vandoorne.
Toro Rosso's Carlos Sainz Jr was 10th quickest in the final qualifying segment.
On the first laps in the Q3 shootout, Vettel once again lowered the track record, with a 1:16.276s time, 0.355s faster than Bottas.
The two Red Bull's were separated by just 0.079s in Verstappen's favour, while Raikkonen was the last driver within a second of Vettel in fifth, 0.602s down.
On his first lap, Hamilton made a mistake at Turn 4 and aborted the lap, leaving only him and Sainz ot set a time on the second runs.
Hulkenberg had a 0.127s advantage over Alonso in P6, with Alonso, in turn 0.351s clear of team-mate Vandoorne.
On the second runs, Vettel's time of 1:16.276s was enough to secure him Pole Position, as no-one, bar Raikkonen, improved on their times, enabling the German to take his second pole position of the season, after Russia.
Raikkonen was second, 0.168s slower than his team-mate, as Bottas was just over a quarter of a second slower in third.
Hamilton's only lap of the session was good enough for third, which got bumped down to fourth as Raikkonen improved.
Verstappen out-qualified Ricciardo by 0.021s as Hulkenberg was ahead of the two McLaren's and Sainz was slowest of the top 10.
Palmer just misses Q3
After a difficult Friday, when he broke the front-wing in FP1 and crashed in FP2, Jolyon Palmer just missed out on a slot in Q3, by the margin of 0.104s from the Toro Rosso of Carlos Sainz, in 10th.
Both Force India's also failed to make the cut, Esteban Ocon 0.184s from a time he needed, while Sergio Perez could only manage 14th quickest for Force India.
Danill Kvyat was 13th for Toro Rosso, allowing Sainz to pull away in the inter-team qualifying battle, with Romain Grosjean slowest of all in the 15 minute segment.
Hamilton broke the track-record with a 1:16.693s time, 0.109s quicker than Vettel could manage with Verstappen, Raikkonen and Bottas following close behind.
Hulkenberg was sixth quickest, ahead of Ricciardo, as both McLaren's made Q3 for the first time this season.
Both Williams out in Q1
The Williams was able to out-qualify Marcus Ericsson in the Sauber, with Ericsson's team-mate Pascal Wehrlein 18th quickest.
Di Resta's team-mate, Lance Stroll was unable to do better than 17th, and missed out on a Q2 slot by just 0.008s, with Kevin Magnussen missing out by virtue of setting a time second.
Both Magnussen and Perez set a time 1.851s slower than Vettel's session benchmark of a 1:17.244s, but as the Mexican set the time first, he made it through to Q2.
Up front, Vettel was just 0.022s ahead of Verstappen, with Raikkonen, Hamilton, Ricciardo and Bottas all slotting in behind.
|5th||Max Verstappen||Red Bull|
|6th||Daniel Ricciardo||Red Bull|
|9th||Carlos Sainz Jr||Toro Rosso|
|11th||Esteban Ocon||Force India|
*Five place grid penalty applied for gearbox change
|13th||Danill Kvyat||Toro Rosso|
|14th||Sergio Perez||Force India|
|19th||Paul di Resta||Williams|