Vettel beat Ferrari's Fernando Alonso by 0.076 seconds, with the Spaniard's team-mate Felipe Massa in third.
Robert Kubica took second for Renault, ahead of the Ferraris of Felipe Massa and Fernando Alonso.
The day's first session saw Hamilton narrowly beat title rival Felipe Massa by just 0.080secs.
The Englishman was demoted to third place behind Ferrari's Felipe Massa and BMW Sauber's Nick Heidfeld.
Grosjean's teammate Kimi Raikkonen took fifth, ahead of the two Ferrari drivers Alonso and Felipe Massa.
The Canadian finished 16th and a massive 1.4secs slower than Sauber team-mate Felipe Massa.
In the other, seven points behind his rival in the standings, is Ferrari's Felipe Massa.
McLaren's Lewis Hamilton survived a puncture and another clash with Ferrari's Felipe Massa to finish fifth.
Schumacher heads an all-Ferrari front row following an impressive debut by his new Brazilian team-mate Felipe Massa.
BBC: SPORT | Motorsport | Formula One | Bahrain Grand Prix as it happened
Ferrari said the Spaniard had signed a three-year contract and that he would partner Brazilian Felipe Massa.
It is not just Perez that has been touted as one of the wolves circling Felipe Massa's garage.
German Nico Hulkenberg was a surprise fourth for Force India ahead of Brazil's Felipe Massa in his Ferrari.
Romain Grosjean claimed seventh, finishing ahead of Ferrari's Felipe Massa, Toro Rosso's Daniel Ricciardo and Red Bull's Mark Webber.
The English driver was demoted from first to third after the Spa race, with Felipe Massa handed the victory.
Ferrari's Felipe Massa was third with the Red Bull of Mark Webber fourth.
BBC: Sebastian Vettel pips Fernando Alonso to German F1 pole
It is not just Felipe Massa's seat that's been put under the spotlight.
Hamilton's nearest rival, Ferrari's Felipe Massa, who sat seven points adrift coming into the final round, won the race.
Ferrari's Felipe Massa will start Sunday's race in third place, with Mercedes' Michael Schumacher a place behind the Brazilian.
Nico Rosberg, who was fastest in final practice, claimed fifth spot ahead of Ferrari's Felipe Massa and McLaren's Heikki Kovalainen.
He has a seven-point lead over Ferrari rival Felipe Massa as he chases a first world championship on 2 November.
The decision dropped him from first to third place and handed the win to his main rival, Ferrari's Felipe Massa.
Schumacher was on the brink of a racing return with Ferrari in August to deputise for the injured Felipe Massa.
Home hope Felipe Massa claimed fifth place in the second Ferrari with Adrian Sutil an excellent sixth for Force India.
There were still plenty of incidents as Felipe Massa spun and hit a wall, losing a front wing from his Ferrari.
Vettel's Red Bull, the Ferraris of Fernando Alonso and Felipe Massa and the two McLarens were covered by just 0.371 seconds.
But his number two Felipe Massa has struggled to make an impression and his future at Ferrari is in some doubt.
Button completed a race simulation at the Circuit de Catalunya on Saturday at the same time as Ferrari driver Felipe Massa.
While Alonso has shown his ability in an underperforming car, teammate Felipe Massa is under increasing pressure to retain his place.
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