In very hot conditions, the 32-year-old German, who won the race in 2013, put a smile on his father Norbert's face as he clocked a best lap time in one minute and 14.013 seconds, outpacing his Ferrari team-mate and nearest rival Charles Leclerc by 0.255secs.
Defending champion and series leader Lewis Hamilton was third for Mercedes, three-tenths of a second off Vettel's pace, ahead of Max Verstappen of Red Bull.
Valtteri Bottas was fifth in the second Mercedes, the team running with revised cooling arrangements, after recovering from a late excursion through a gravel trap after going off at the Sachs curve.
Pierre Gasly continued his improved form for Toro Rosso in sixth ahead of Carlos Sainz of McLaren, Romain Grosjean of the leading Haas, Lance Stroll in the improved Racing Point and Daniel Ricciardo who was 10th for Renault.
The session was run with an air temperature of 35 degrees Celsius and a track temperature of 48 degrees, both forecast to rise steeply later on Thursday as Europe continued to endure a record-breaking heat wave.
The two Ferrari drivers clocked their best laps on soft tyres later in the session after the Mercedes duo had been quickest on medium compounds for the first hour.
There were few incidents - a brief red flag stoppage after 20 minutes when Kevin Magnussen stopped on track in his Haas with an engine sensor problem and Bottas' 'off' in the closing minutes.