The 22-year-old clocked 26.10 seconds, lowering his own mark of 26.42 set two years ago in the semi-finals of the world champs in Kazan, Russia, on his way to winning the final.
Fresh from winning the men's 100m breaststroke gold on Monday night, Peaty blasted out his world-record time to qualify for Tuesday night's semi-finals.
"I wasn't going for a world record, I was just trying to qualify for the semis," said Peaty, who says he can go even faster.
"It's still only 10 in the morning, which is very early for a world record, but we'll see.
"That world record was two years old, so it was kind of due another push on."
It is the second world-record to fall at the world championships in Budapest.
Sarah Sjostrom of Sweden became the first woman to swim the 100m freestyle in under 52 seconds on Sunday.
It is the third time Peaty has held the 50m world record in his career.
His main rival in Wednesday's final looks to be Cameron van der Burgh, who was only 0.44secs behind Peaty in the heats.
Kevin Cordes of the United States, the 50m bronze medallist in 2015, and Brazil's Joao Gomes were also within a second of Peaty's time in the heats.
"I saw Cam and Kevin going quite fast, obviously I was just trying to put a marker down, but I was quite relaxed," said Peaty.
Van der Burgh, the 50m silver medallist two years ago, was unimpressed with Peaty's time.
"World records in heats don't win finals," said the South African.
"Now we know what he is capable of, we can go back and plan on going forward.
Disclaimer: No Business Standard Journalist was involved in creation of this content
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