The 50-year-old actress, whose performances were almost always flawless during the season, beat out last-place finisher Palin Tuesday on the hit ABC show and actor Kyle Massey, who came in second.
Grey and professional partner Derek Hough earned a string of perfect scores on their way to the mirrorball trophy. The couple consistently topped the judges' leaderboard throughout the season, but Palin's cadre of voter support led to some surprising upsets, including Brandy's elimination after earning a perfect score last week.
Palin's improbable run to the finals had been championed by some conservative bloggers running get-out-the-vote campaigns. She came into the season finale in last place and said she was leaving her fate to the voters.
"Going out there and winning this would mean a lot. It would be like a big middle finger to all the people out there that hate my mom and hate me," Sarah Palin's daughter said during Tuesday's show, which featured a reunion of the season's cast members and performances from Christina Aguilera.
Grey went into Tuesday's telecast in first place and effortlessly remained there.
Palin made it to the finals despite mediocre and at times poor performances. She said it was challenging to overcome the flurry of media coverage that erupted when she was voted in over Brandy -- who had received a perfect score for her tango -- on the hit show, prompting some viewers to question the veracity of the "Dancing" voting system.
"Dancing" producers said Tuesday that "a record amount of activity" overloaded its online and telephone voting systems after Monday's episode.
"Some viewers reported experiencing difficulties registering their votes for the 'Dancing With the Stars' finale, which affected each finalist equally," show producers said in a statement. "The issue was promptly addressed" and voting times were not extended.
The judges had the final say Tuesday, when each of the three finalists performed two last dances for judges' scores. Viewer votes counted for half of each competitor's overall total.
The season's contestants got to perform one last number, with Brandy receiving a standing ovation for her two-step.
ABC is owned by The Walt Disney Co.