Lyle, who is making his making his 38th appearance in the event this week, was the long-time leader after posting a five-under-par total on a sun-kissed day in Georgia.
But that effort was matched by Wallace, one of the later starters, and the Englishman then claimed the title with a birdie on the third extra hole.
Wallace, who is making his debut in the season’s opening major, was helped in his effort by a hole-in-one at the eighth.
“I had no idea,” said Lyle in reply to being asked if he had expected to come close.
“I missed the first green but then strung some birdies together - four in a row.
“I was miffed that I missed a five-footer uphill at the eighth hole as I thought, ‘if I can hole that, I should be able to beat my record in this event of 22’.”
The two-time Par 3 event winner added: “You just try to challenge the golf course.
“You have have big crowds and you want to make some 1’s if you can and, if things don’t go well in the first three of four holes, just have some fun.”
The win left Wallace, who is bidding to become the first debutant to win The Masters for 40 years, an extra hurdle to overcome.
Since the pre-tournament contest started in 1960, nobody has ever become par-three and Masters champion in the same week.
Wallace and Lyle finished a shot ahead of Bubba Watson, Martin Kaymer and amateur Devon Bling, who made a hole-in-one on the seventh.
Ireland’s Shane Lowry recorded an ace on the second and Mark O’Meara made one on the fifth.