Kenny Miller and Lee McCulloch both bagged early goals against Ukraine before Andriy Shevchenko hauled the visitors back into the match and threw the outcome into doubt for the Group B leaders.
It was left to McFadden - whose superb strike sealed a famous victory in France last month - to ensure another crucial victory as Alex McLeish's men edge ever closer to next summer's finals.
The 3-1 win also ended Oleg Blokhin's faint hopes of guiding Ukraine to Austria and Switzerland.
Scotland succumbed to a 2-0 defeat on a dark and dreary night in Kiev 12 months ago but this time around optimism radiated from the 51,336 crowd.
The final strains of 'I Have a Dream' were still echoing around a packed Hampden when Scotland set about making the dream a reality.
A hamstring injury meant Miller had celebrated the now famous win over France in a pub in Birmingham surrounded by jubilant members of the Tartan Army. This time, he made sure he was in the thick of the action.
An Andriy Nesmachniy challenge on Scott Brown earned the Ukraine defender a yellow card and the home nation a free-kick in a dangerous area.
McFadden whipped a tantalising ball into the box from the right flank and Miller did well to squeeze between two yellow shirts and nod home from inside the six-yard box with just three minutes gone.
Ukraine attempted to hit back through Oleg Gusev, who embarked on a mazy run into the area before unleashing a shot which dipped just over the crossbar and drew gasps of relief from the home crowd.
Relief then turned to delirium as Scotland doubled their advantage in the 10th minute.
A free-kick was played short between Barry Ferguson and McFadden before skipper Ferguson hooked the ball into the path of Rangers club-mate McCulloch, who was on the left edge of the penalty area.
The former Wigan man left goalkeeper Oleksandr Shovkovskiy flapping as he sent a delicious curling right-footed shot into the far top corner.
Shevchenko then followed Nesmachniy into the referee's book for hacking down Brown, before pulling a goal back for Ukraine in the 24th minute.
Nesmachniy caused havoc by punting into the Scotland box, Andriy Vorobei flicked on to Shevchenko and the Chelsea man gratefully rifled into the roof of the net.
Scotland could have restored their two-goal lead 10 minutes before the break had Dutch referee Pieter Vink pointed to the penalty spot. Alan Hutton appeared to be tripped by Vorobei in almost exactly the same spot where Saulius Mikoliunas earned his now infamous penalty for Lithuania but there was to be no award this time.
Seconds later Vorobei was cautioned for another foul on the Rangers full-back but the yellow card was scant consolation for the seething home supporters.
There were then another two penalty claims - one for each side - before half-time. Shevchenko went to ground under pressure from Gary Naysmith, before McFadden looked to be tripped by Anatoliy Tymoschuk.
Neither plea appeared to be as genuine as Hutton's but McCulloch's complaints earned him a costly booking which rules him out of Wednesday's qualifier in Georgia. Ferguson also went into the book.
Ukraine attempted to crank up the pressure on their hosts in the second half and Andriy Voronin could have restored parity with a vicious 25-yard volley which fizzed inches wide of target just a few minutes after the restart.
The experienced Christian Dailly - making his first appearance since the friendly in Austria back in May - was then thrust into the action in place of McCulloch after an hour, before Miller's snatched shot trundled wide.
Instead, it was McFadden who once again sealed a memorable win for the Scots.
Hutton was the provider with a cross from the right to the feet of the Everton striker who lashed home from just inside the area with 22 minutes remaining.
Brown limped out of the action clutching his hamstring, before Garry O'Connor's yellow card ruled him out of the next match, meaning further selection problems for McLeish with the Georgia clash looming large in four days time.
But, just at that moment, Scotland were determined to savour another important victory.
