The former Hornets forward scored against his old team with an extra-time penalty securing a lucrative promotion for Ian Holloway's side after eight years out of the top flight
After a forgettable first half, Crystal Palace put Watford's defence to the test in the second period with Manuel Almunia pulling off a string of impressive saves to take the game into extra-time.
Julian Speroni remarkably denied Troy Deeney the chance to grab the lead during an energy-sapping extra 30 minutes before Cassetti hung out a tired leg, bringing down Wilfried Zaha and allowing Phillips to coolly dispatch the £120 million penalty, sparking euphoric scenes among the Palace supporters.
Zaha overcame an ankle knock to make Ian Holloway's starting line-up but Palace arrived at Wembley without their top scorer Glenn Murray, who suffered a cruciate ligament injury in the first leg of the play-off semi-final against Brighton. Aaron Wilbraham led the attack with veteran frontman Phillips starting on the bench.
Gianfranco Zola had no new injury worries from the dramatic win over Leicester in their play-off semi-final. The Italian opted for Daniel Pudil over Matt Briggs in defence, while Deeney again partnered Player of the Year Matej Vydra in attack.
The magnitude of the occasion contributed to a very tentative first half. Between them, both Palace and Watford only managed a single meaningful shot in the entire first period.
Vydra was the player who had the effort after half an hour of probing at Wembley. The Czech striker, on loan from Udinese, had his effort from 20-yards blocked by Damien Delaney after fine approach play from Almen Abdi and Deeney.
Zaha provided the occasional exciting run without ever really threatening to score in a half where defenders were definitely on top.
Deeny and Wilbraham both had efforts blocked for their sides early in the second half as some pockets of space began to open up at either end.
Watford were then enjoying a good spell of pressure when suddenly Palace sprung a counterattack which should have resulted in the opening goal near the hour mark.
Wilbraham was played clear through on goal but he elected to cut back on to his left foot inside the box, perhaps due to a lack of pace, allowing Almunia to rush off his line and block the shot.
The Hornets again had the Spanish goalkeeper to thank for keeping them level moments later as he denied Stuart O'Keefe and Wilbraham, once more, within the space of a few minutes with two fantastic reaction saves from close range.
Palace finished the 90 minutes in the ascendancy but struggled to penetrate a resolute Hornets defence.
A final gilt-edged chance once again fell to the wasteful Wilbraham. Zaha cut in from the right flank to thread a clever ball into the striker but he was kept out by Almunia for the third time. The former Arsenal goalkeeper got down low to make another impressive save using his feet.
An audacious overhead kick and a shot dragged wide from range, both from Deeney, was the best Watford could manage before the referee signalled the end of normal time.
Speroni prevented what looked like a certain goal three minutes into extra-time. Deeney peeled off his defender at the back post to gather Abdi's cross but before he could muster a shot the Palace goalkeeper pounced at his feet and vitally got a strong arm to the ball.
The breakthrough finally came at the end of the first period of extra-time. Marco Cassetti hung out a tired leg to bring down Zaha in the area and award Palace an injury-time penalty.
Former Watford striker Phillips, made no mistake in dispatching the spot-kick - using all his experience to remain cool, firing the ball into the top corner past Almunia and sending the Eagles' supporters into raptures.
The Hornets huffed and puffed in the second period of extra-time but could not quite fashion the chance needed to grab an equaliser. Joel Ward's goal-line clearance, his second crucial block in five minutes with seconds remaining, sealed the Eagles' promotion.
Selhurst Park will now host Premier League football for the first time since the 2004-05 season.