Tabilo saved two match points to force a tiebreak in the third set and set up his own championship point with a drop-shot. The 28-year-old fell to the floor as exhausted Musetti's forehand hit the net, sealing the Chilean's third ATP 250 title.
Also in China French Open quarter-finalist Alexander Bublik edged Valentin Royer 7-6 (7-4) 7-6 (7-4) in the Hangzhou Open final.
"It's been a very, very tough year. Lots of injuries. So, just being here right now, it's unbelievable. I still can't believe it," said Tabilo, ranked 112th in the world.
Italy's Musetti, who reached the French Open semi-finals this year, has lost the Chengdu final twice in a row, having gone down to China's Shang Juncheng last year.
"It's a tough night for me, I guess. Probably was not my day," said Musetti, who has lost five consecutive finals on the ATP tour.
"It's three years now that I've made some finals but never lifted a trophy. Every time we're a step closer, so hopefully next is the lucky one."
Bublik's Hangzhou Open triumph has made him the second most successful singles player on the ATP tour so far this year with four titles, behind Carlos Alcaraz who has lifted seven.
World No. 19 Bublik was tested by French qualifier Royer in the final as neither player could break serve, with both sets going to a tiebreak.
Third seed Bublik's superior serve made the difference as he landed 21 aces in the match, while world number 88 Royer produced eight.
"I really had to serve and do my best in order to win ... it was one of the toughest finals I have played in terms of nerves," Kazakh Bublik said.
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