The 33-year-old's 6-4, 7-5 win over Xavier Malisse vaulted him to the top of the rankings after Lleyton Hewitt had earlier lost at Queen's Club for the first time in four years.
"It feels amazing to accomplish it at this stage in my career," the American said after becoming the oldest world number one. "When you go out there you are always trying to be the best."
Wimbledon champion Hewitt dropped to number two when he fell in the quarter-finals to Sebastien Grosjean 6-3, 6-4.
The Australian had been gunning for an unprecedented fourth straight title here but instead suffered his first Queen's loss since 1999.
"I knew nobody had done it before," Hewitt said of the record. "But it wasn't just winning today, I would have had to win a couple more matches as well.
"When you look at it, three in a row here isn't too bad, mate."
Back in 1999 it was grasscourt maestro and winner of seven Wimbledon crowns Pete Sampras who had beaten him.
WIMBLEDON SEEDING
This time it was a French baseliner more comfortable on hard courts and clay courts than turf.
The defeat denies the Wimbledon champion vital match practice before he opens the defence of his crown in just over week.
"I would have preferred to get a couple more matches in, but there you go," Hewitt said. "I had a lot of chances and just didn't take them."
Despite relinquishing his ranking, Hewitt may still be seeded one for Wimbledon as the tournament is the only one which reserves the right to deviate from the ATP's entry system ranking list.
Organisers also take a player's grasscourt record over a number of years into account.
Either way, the Australian is not too bothered.
"Number one or two? Top or bottom, mate. I couldn't care less," he said.
Agassi needed just 61 minutes to grab the top spot again this year. He had toppled Hewitt for a fortnight in April to become the oldest world number one since rankings began in 1973.
Malisse, a Wimbledon semi-finalist last year, could not keep up with the American's pace on a scorching centre court.
Agassi will next face the winner of Andy Roddick and Taylor Dent. Grosjean faces either Tim Henman or Anthony Dupuis.
