Defending Olympic champion Pieter van den Hoogenband of the Netherlands got off to a quick start — more than 1 second under world-record pace at the halfway point — but couldn't maintain it.
Thorpe, wearing a black suit that left only his head, hands and huge feet exposed, caught van den Hoogenband on the final 50 meters, touching the wall with an Olympic record of 1 minute, 44.71 seconds. The Dutchman claimed silver at 1:45.23, while Phelps never caught the top two.
He was in third most of the way, setting an American record of 1:45.23. But that was only good enough for bronze.
Phelps came into the games hoping to break Mark Spitz's 1972 record of seven gold medals, but his quest ended after only three races. He opened the Olympics with a world-record performance in the 400 individual medley to win gold, but settled for bronze when the American team faltered in the 400 free relay Sunday.
Phelps has only five races left, meaning six golds is the best he can do.
The 19-year-old from Baltimore had added the 200 free to his program because of his desire for a head-to-head meeting with Thorpe. It was their only individual meeting of the Olympics.
The race was the most anticipated swimming event of the Athens Games — perhaps the No. 1 event of the entire Olympics.
There was Thorpe, the world record-holder and holder of the eight of the nine fastest times in history. Beloved in his native Australia, the "Thorpedo" is known for his oversized feet and imposing black suit.
There was van den Hoogenband, the defending Olympic champion. The "Flying Dutchman" pulled off a stunning upset of Thorpe at the Sydney Games four years ago, sending the Aussies into a state of shock.
And, finally, there was Phelps, who lacks a catchy nickname but has become the world's greatest all-around swimmer.
In the end, the Thorpedo held off Hoogie and the young American and ensured that Mark Spitz's record from the Munich games will live on for another four years.
In other Olympic news:
International judo officials canceled a meeting Monday to investigate whether a two-time champion from Iran who reportedly said he wouldn't fight an Israeli opponent deliberately avoided the first-round bout by showing up overweight.
International Judo Federation spokesman Michel Brousse said that some officials were unable to attend the meeting on Arash Miresmaeli and could not say when the IJF would next meet.
Miresmaeili, a favorite in the under-66kg class, was declared overweight at the morning weigh-in and disqualified for his first-round bout against Ehud Vaks.
Iran does not recognize Israel and bans any contact with the Jewish state.
Iranian athletes have refused to compete against Israelis in the past. At the 2001 judo world championships, Mahed Malekmohammadi of Iran did not compete again Yoel Razvozov.
Israel is demanding that Olympics officials punish Iran, reports CBS News Correspondent Robert Berger.