The 33-year-old downed his Sheffield opponent in a thrilling 73-minute match, winning 11-6, 7-11, 5-11, 11-7, 11-4 in the second round on Sunday night.
The pair met for the 34th time last month when Matthew scored an impressive straight-games win in the final of the British Grand Prix.
But under the chandeliers of the Grand Central Terminal’s Vanderbilt Hall, Willstrop turned recent history on its head, producing a free-flowing attacking performance that saw him pull out every tantalising trick in his repertoire and recover from going 1-2 down in games to complete the victory, his first over Matthew since the 2007 English Open Final.
“It’s taken me a long time to notch that win against him, so I’m pleased,” said Willstrop.
“Last month I didn’t play well against him and I was more disappointed with the performance than the result.
“I think the squash today was as good as it has ever been between us and we both played some very accurate stuff. I know what I’m capable of and I’ve been trying to work out the way to break him down for a long time. Today I did just enough to come through.
“And the best thing is I get to play here once again because I love being here at this event. To be out there and performing well in a good game of squash, it’s just brilliant.”
After the match Matthew said: “He deserved it – even when I was 2-1 up I didn’t feel like I was on top.
“He was the aggressor and I felt like I was chasing it. He’s a class player and we’ve played some massive matches, so that win was coming some day. He’s too good a player to have a record like that.”
Willstrop will now face tournament surprise package Paul Coll for a place in the semi-finals after the 24-year-old qualifier from New Zealand scored an unexpected win over World No.7 and ex-Harvard student Ali Farag to reach the last eight of a PSA World Series tournament for the first time in his career.
The physical powerhouse, who competes in Crossfit games for pleasure when not in squash action, prevailed 3-1 to extend his unbeaten streak on the PSA World Tour to 10 consecutive matches.
Coll came through qualification to defy the odds and claim the PSA M100 Channel Vas Championship in December – a victory that saw him become the first Kiwi since 1995 to break into the top 20 rankings – and continued to enjoy a purple patch as he nullified the supremely talented Farag 11-8, 11-8, 8-11, 11-7.
“I’m very happy – I’m was worried that I’d get knocked out in qualification here so to reach the quarter-finals is very pleasing,” said Coll.
“I know Ali from juniors and know he’s a quality player who’s very talented with the racket, so I told myself just to focus on countering what he does and take it from there.
“I’ve been training hard, like I always do, and it has started to pay off recently. I just try to play the way I like to play. I love the physical side of the game and I’m just embracing that and it’s working for me at the minute.
“Winning in December gave me a tonne of belief that I can compete with these guys up at the very top and to be backing that up again this week is a huge confidence boost.”
World Champion Karim Abdel Gawad won a five-game war of attrition with Australian Cameron Pilley to keep his tournament alive and set up a meeting with Germany’s Simon Rösner while in the Women’s event 2016 runner-up and local New York crowd favourite Amanda Sobhy got her 2017 campaign off to an emphatic winning start by demolishing Australia’s Donna Urquhart 3-0 in just 24 minutes.
Sobhy put in a performance packed with typical aggressive shot making as she out-gunned and out-thought Urquhart to send out a strong signal to the opposition as she looks to improve on last year’s result.
Results – Men’s Second Round (Bottom Half): 2017 J.P. Morgan Tournament of Champions
James Willstrop (ENG) bt  Nick Matthew (ENG) 3-2: 11-6, 7-11, 5-11, 11-7, 11-4 (73m)
[Q] Paul Coll (NZL) bt  Ali Farag (EGY) 3-1: 11-8, 11-8, 8-11, 11-7 (60m)
 Simon Rösner (GER) bt [Q] Nicolas Mueller (SUI) 3-0: 11-6, 11-8, 11-6 (41m)
 Karim Abdel Gawad (EGY) bt Cameron Pilley (AUS) 3-2: 8-11, 11-4, 11-6, 8-11, 11-9 (82m)
Regarding the 'streak', had to end one day. Ridiculous really to have that record v a player as good as James! Time to regroup & come again https://t.co/XaN7RewRvk— Nick Matthew OBE (@nickmatthew) January 15, 2017
Draw – Men’s Quarter-finals (To be played Jan 16)
 Mohamed ElShorbagy (EGY) v  Marwan ElShorbagy (EGY)
Tarek Momen (EGY) v  Gregory Gaultier (FRA)
Results – Women’s First Round (Bottom Half): 2017 J.P. Morgan Tournament of Champions
 Laura Massaro (ENG) bt [Q] Olivia Blatchford (USA) 3-0: 11-3, 11-6, 11-4 (30m)
 Joelle King (NZL) bt [WC] Natalie Grinham (NED) 3-0: 11-4, 11-9, 11-7 (27m)
 Victoria Lust (ENG) bt [Q] Nele Gilis (BEL) 3-1: 13-11, 11-6, 9-11, 11-9 (58m)
 Omneya Abdel Kawy (EGY) bt [Q] Hania El Hammamy (EGY) 3-0: 11-9, 11-8, 11-9 (41m)
 Amanda Sobhy (USA) bt Donna Urquhart (AUS) 3-0: 11-3, 11-8, 11-3 (24m)
 Sarah-Jane Perry (ENG) bt Mariam Metwally (EGY) 3-2: 11-6, 8-11, 12-10, 8-11, 11-8 (64m)
Dipika Pallikal Karthik (IND) bt  Emily Whitlock (ENG) 3-1: 13-11, 11-6, 5-11, 11-3 (39m)
 Raneem El Welily (EGY) bt [Q] Hollie Naughton (CAN) 3-0: 11-7, 11-3, 11-6 (23m)
Draw – Second Round
 Nour El Sherbini (EGY) v [Q] Salma Hany Ibrahim (EGY)
 Annie Au (HKG) v  Nicol David (MAS)
 Camille Serme (FRA) v  Joshna Chinappa (IND)
 Nour El Tayeb (EGY) v  Nouran Gohar (EGY)
 Laura Massaro (ENG) v  Joelle King (NZL)
 Victoria Lust (ENG) v  Omneya Abdel Kawy (EGY)
 Amanda Sobhy (USA) v  Sarah-Jane Perry (ENG)
Dipika Pallikal Karthik (IND) v  Raneem El Welily (EGY)