Having won Sunday's home leg 3-0 in a match marred by allegations of cheating, the Malaysians came under enormous pressure in Jakarta before losing 2-1 on Wednesday night.
The 4-2 aggregate win gave Malaysia the AFF Suzuki Cup for the first time. The tournament is contested every two years by 10 teams from the Association of South East Asian Nations.
On Thursday, Malaysia's Prime Minister Najib Razak declared Dec. 31 a public holiday, calling the result the "greatest night in Malaysian football".
Football has a fanatical following in both countries and around 85,000 watched the first leg at the national stadium in Kuala Lumpur, and a similar number in Jakarta.
Malaysian players said the atmosphere in the build-up to the second leg Jakarta "was like going to war".
"We came in armoured vehicles (to the stadium). It was a different atmosphere altogether but we prevailed and did not succumb to pressure," Malaysian media quoted skipper Safiq Rahim as saying.
The first leg was marred by allegations that Malaysian fans had used laser pens to shine beams into the Indonesian players' eyes, distracting them at key moments. At one point the Indonesians walked off the pitch in protest.
Neighbours Malaysia and Indonesia are long-standing regional rivals who have feuded over issues ranging from sea borders to cultural heritage.
Indonesia's 240 million population dwarfs Malaysia's 28 million, but while the former is southeast Asia's biggest economy, the latter's GDP per capita of over $13,000 is more than three times that of Indonesia.
Hundreds of thousands of Indonesians work doing manual labour in Malaysia - many illegally - and they are routinely rounded up and deported.
After the victory, Malaysians flooded social website Twitter with phrases like "Malaysia Boleh" (Malaysia can), and praised goalkeeper Khairul Fahmi, who warded off five scoring attempts by the Indonesians.
The Indonesians had the last laugh, however. Boasting 15 percent of the world's Twitter users, they managed to get complaints about "Malaser" trending in the top 10 topics.
Malaysia was a leading regional football power in the 1970s but has since fallen off the radar due to a lack of good players and investment in clubs.
Indonesia too has long flattered to deceive, but there is growing interest by European football powers in the world's fourth most populous country and English Premier League club Liverpool are considering opening an academy there in 2011.
