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 forgetful first half, Crystal Palace put Watford's defense 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 Marco Cassetti hung out a tired leg, bringing down Wilfried Zaha and allowing Phillips to cooly dispatch the 120 million-pound penalty, sparking euphoric scenes among the Palace supporters at Wembley Stadium.
Zaha overcame an ankle knock to make Ian Holloway's starting lineup, but Palace arrived at Wembley without their topscorer Glenn Murray, who suffered a cruciate ligament injury prior to the playoffs. 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 playoff semifinal. The Italian opted for Daniel Pudil over Matt Briggs in defense, while Deeney again partnered Player of the Year Matej Vydra in attack.
The magnitude of the occassion 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, who will head to Manchester United next season, provided the occasional exciting run without ever really threatening to score in a half where defenders had their way.
Deeny and Wilbraham both had efforts blocked for their sides early in the second half as some pockets of space began to open up in either backline. The Hornets were then enjoying a good spell of pressure when suddenly Palace sprung a counterattack that 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.
Watford had the Spanish goalkeeper to thank for keeping the score level again 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.
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, were 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, as Cassetti hauled down Zaha in the area, awarding Palace a penalty and an opportunity to go ahead.
Phillips, a former Watford striker, made no mistake in dispatching the spot kick. Using his experience to remain cool, Phillips fired the ball into the top corner past Almunia, sending the Eagles' supporters into raptures.
The Hornets huffed and puffed in the second period of extra-time but couldn't quite fashion the chance needed to grab an equalizer. Joel Ward's goal-line clearance, his second in five minutes, with seconds remaining sealed the Eagles promotion, as the club joined Cardiff City and Hull City in going up, and Selhurst Park will host Premier League football for the first time since the 2004-05 season.