Seattle did not make a shot on target throughout 120 minutes of action but defender Roman Torres blasted in the decisive spot-kick.
Seattle did not make a shot on target throughout 120 minutes of action but defender Roman Torres blasted in the decisive spot-kick to leave the home crowd deflated after Toronto's first ever final appearance.
It was a largely scrappy encounter but Toronto had the better chances, especially in extra-time where Seattle's Swiss-born keeper Stefan Frei produced a brilliant save to keep out a Jozy Altidore header.
Frei, who spent four years with Toronto earlier in his career, was the hero after the penalty shoot-out and was voted the game's Most Valuable Player.
Seattle entered MLS in 2009 and have reached the play-offs in every season but were appearing in their first championship game despite a dreadful first half to the regular season.
Coach Brian Schmetzer, who took over the team mid-season and turned their fortunes around, handed credit to his players.
"I'm awfully proud of those guys and I am very happy for the travelling support and also the fans who couldn't be out here to see the game live. I am proud, happy and thankful for the opportunity," he said.
Toronto's fans have endured some poor seasons since beginning life in MLS in 2007, only making the play-offs for the first time last season and despite spending heavily on experienced players they remain trophy-less.
"It was two teams who weren't willing to give away an inch throughout the game," said Toronto coach Greg Vanney, who said he felt "numb" after the loss.
"I thought both teams were committed to protecting their goal but we pushed a little harder to try to get the goal. I know what it feels like to be in the locker-room as a player like this ... and it hurts," he said.
Toronto started brightly and their US international striker Altidore went close to an early opener in just the second minute wide when he found a little space on the left but screwed his shot just wide of the far post.
Toronto's biggest attacking threat, Italian striker Sebastian Giovinco, had two opportunities with free-kicks from distance but both times he was only able to strike the ball into the wall.
Goalless at the break, Toronto would have been happy with their aggressive work in midfield but they too needed to find a way to better supply their forwards.
Four minutes after the restart, Giovinco was finally given an opening when Jonathan Osorio fed him in the right-channel but the former Juventus forward could only find the side netting.
The game became increasingly untidy with little in the way of chances and the strikers on both teams isolated and poorly served.
In injury time, at the end of normal time, Toronto threatened from a Michael Bradley corner but Frei bravely got down to stop a stooping Altidore at close-range, injuring himself in the process.
For the capacity 36,045 crowd it had been a frustrating - and chilly evening and there was to be an extra 30 minutes of it to see if the two teams could be separated.
Toronto's French substitute Benoit Cheyrou had a promising opening in the first period of extra-time but his shot was weak and then after the re-start Canadian substitute Tosaint Ricketts, introduced for Giovinco, shot wide from a promising position.
Frei then did superbly, at full stretch to keep out an Altidore header, after a fine cross from Ricketts as Toronto finally enjoyed some pressure but it was to be penalties.
After captain Bradley had a soft shot saved by Frei and Alvaro Fernandez failed to convert for Seattle, the shoot-out went to sudden death and Toronto?s Justin Morrow blasted his kick against the bar leaving Torres to convert and start the celebrations in Seattle.