Williams, 37, did not cope with the 19-year-old's quality in a 6-3 7-5 loss.
Canadian 15th seed Andreescu, in the main draw here for the first time, blew a double break in the second set before taking her third match point and falling to the ground in disbelief.
"This year has been a dream come true," Andreescu told the crowd.
"I am beyond grateful and truly blessed. I've worked really hard for this moment. To play on this stage against Serena - a true legend of the sport - is amazing."
To the disappointment of a stunned home crowd on a passionate Arthur Ashe Stadium, Williams has now lost four successive major finals.
"Bianca played an unbelievable match," Williams said. "I'm so proud and happy for you, it was incredible tennis out there."
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