The 20-year-old American was third after the short program, behind Japanese Kaori Sakamoto, 25, and Ami Nakai, 17.
But with her Donna Summer number, Liu brought the house down in the arena in Milan - and in the end she received a total of 226.79 points.
Sakamoto came in second with 224.90 points, ahead of rising star Nakai, who, despite entering the free program with the most points under her belt, was overjoyed to go home with 219.16 points and a bronze medal.
The 18-year-old Russian skater Adelia Petrosian, competing under a neutral flag, was confident before her program and attempted an incredibly daring quadruple toe loop. But she fell and finished sixth.
Alysa Liu was also part of the American team that won gold in the team competition earlier in the Olympics.
