The time was also the fastest in the world this year.
Lagat's blistering early pace put him nearly a half a lap ahead of the field and he went on to finis more than seven seconds ahead of countryman Laban Rotich.
U.S. Olympian Alan Webb was third.
"It was one of the greatest miles I've been in," Lagat said. "I felt strong. I told the guy (the pacemaker), keep on pushing, keep on moving.
"I wanted to run (the record) because 3:52 is not easy."
The time broke Algerian Noureddine Morceli's Madison Square Garden best of 3:52.99 set in 1992.
Meanwhile, world indoor champion Allen Johnson overcame a rough early portion of his race to edge French record holder Ladji Doucoure in the men's 60 metres hurdles.
The 33-year-old Johnson's time of 7.53 seconds was the fastest in the world this year.
Doucoure took second in 7.55 seconds.
