Melzer, who bested top-seeded American John Isner in the quarterfinals and No. 3 seed Radek Stepanek of the Czech Republic in the semis, knocked off another favored opponent by topping fourth-seeded Raonic 7-5, 7-6 (7-4).
Melzer, 30, shook off 22 aces from the red-hot Canadian and battled back in the second set to notch his first win of the year and fourth of his career.
The 21-year-old Raonic entered Sunday's match with a 15-1 record in 2012, including titles at San Jose and Chennai.
Raonic fell in the Memphis finals for the second straight year.