The 29-year-old powered home to win in 52.20sec at rain-soaked Drake Stadium, obliterating the 16-year-old previous world record of 52.34sec set by Russia's Yuliya Pechonkina in 2003.
"I'm just shocked," Muhammad said. "My coach kept telling me (the record) was there. I just had to trust that and go for it.
"I wanted it so bad I knew I had to go out there and prove myself."
Muhammad, the first American woman to win Olympic gold in the event at the 2016 Rio de Janeiro games, later revealed she had an injury scare heading into this week's event, suffering a concussion in a training run two weeks ago.
However, she revealed she had been quietly confident that she could threaten Pechonkina's benchmark.
"I was hoping for it this weekend," Muhammad. "I just trusted in what we'd been working for up to this point."
Muhammad had set a furious pace over the opening 300m to lead coming into the home straight, and then pulled clear from Sydney McLaughlin, who finished second in 52.88 and Ashley Spencer (53.11).
Muhammad's record-breaking display put the seal on the final events of the four-day meeting, the US trials for this year's World Championships in Doha.
- Lyles romps in 200m -
In other events, charismatic rising sprint star Noah Lyles made sure of his spot on the team for Qatar with a blistering win in the 200m.
Lyles, who warmed up in the blocks by copying mixed martial arts fighter Conor McGregor's swishing arms routine, scorched to a win in 19.78sec, with 100m winner and rival Christian Coleman crossing second in 20.02. Ameer Webb was third in 20.45.
Lyles, who broke into a dance routine inspired by NBA star Kevin Durant after sealing the win, was neck-and-neck with Coleman with around 60 metres to go before pulling clear to take the tape.
"All I cared about today was the win," Lyles, 22, said."USA's the hardest team to make and anything can happen over the three rounds.
"This was my first time going over three rounds so I was really excited to see what I could do," added Lyles, who was unfazed by the rainy conditions.
"We train in all conditions. I live in Florida and it is hot and rains at any time in the day," he said. "Light drizzle doesn't bother me."
Sprint rival Coleman meanwhile confirmed he plans to attempt a sprint double in Doha.
"That's the plan right now," Coleman said. "I feel like I was built to do both."
In the women's 200m, meanwhile, Dezerea Bryant took victory with a time of 22.47, crossing ahead of Brittany Brown and Angie Annelus.
The men's 110m hurdles saw an upset with Daniel Roberts beating Grant Holloway, this season's fastest man over the distance, with a time of 13.23sec.
Holloway finished second in 13.36 while Devon Allen was third in 13.38.
The men's 1,500m saw Craig Engels score a notable victory over 2016 Olympic champion Matthew Centrowitz, winning in 3min 44.93sec.
Centrowitz was second in 3:44.97 while Josh Thompson was third in 3:45.25.
In the women's 3,000m steeplechase, reigning world champion Emma Coburn powered to her sixth consecutive US crown to win in 9min 25.63sec.
Coburn, the 2016 Olympics bronze medallist, held off a late challenge from Courtney Frerichs down the stretch, with Colleen Quigley finishing third.
Coburn's winning time was roughly 30 seconds slower than the world leading time this year set by Kenya's Beatrice Chepkoech of 8:55.58.