Vettel's Red Bull teammate Mark Webber of Australia, who won the British Grand Prix two weeks ago, was third fastest but will be dropped five places on Sunday's grid because of a gearbox change.
As a result, seven-time F1 champion Michael Schumacher of Germany moved up from fourth to third in his Mercedes, putting him in position to win a record fifth race on the Hockenheim circuit. Schumacher has yet to win a grand prix three seasons into his comeback.
Alonso has a 13-point lead over Webber heading into the 10th of 20 races this season and is looking for his third win of the year after victories in the Malaysian and European GPs.
Alonso, who has 22 poles in his career to go with 29 wins, clearly didn't enjoy driving his Ferrari on Saturday's water-logged circuit — despite taking pole.
"It wasn't fun for sure," the Spaniard said.
Nico Hulkenberg of Germany was fifth fastest for the session in his Force India and Pastor Maldonado of Venezuela came in sixth in his Williams. Both will also move up a position after Webber's penalty.
Alonso and his rivals could have an easier time on Sunday, with the forecast predicting dry weather.
"The conditions were on the limit but they were the same for everybody," Alonso said. "There was a lot of aquaplaning.
"I think we made a good strategic position to stop and change tires late in the third session, that helped us a lot."
After a dry first session, a loud burst of thunder foretold what was to follow — a heavy storm that drenched the circuit during the second session. The cars began slipping all over the track, but there were no major incidents.
The rain stopped in time for the third session, though the track remained covered by water.
"Extremely tricky conditions, it was a bit like a lottery. You could lose the car without making a mistake," said Vettel, whose hometown was 30 minutes away.
As the drivers raced to get better times on the drying track late in qualifying, Vettel lost time with teammate Webber in front of him.
"I probably lost a good lap there, but it's not his fault, you can't see anything in your rearview mirror because of the spray," Vettel said. "Maybe I could have gone faster but we'll never know if it would have been enough to beat Fernando."
Webber said he was pleased with his run, despite losing five places.
"I am happy to be quite a way up there in these dodgy conditions," the Australian said.
Schumacher crashed heavily in Friday's practice but emerged from qualifying looking like a contender.
"That's certainly a nice way to start the German Grand Prix — we had been expecting a position between fifth and seventh on the grid, so fourth in qualifying, which will become third place on the grid, is even better," the 43-year-old veteran said.
"Perhaps it would have been even better to change to a new set of tires right at the end, but I don't think we could have done much more today," Schumacher said.
McLaren teammates Jenson Button and Lewis Hamilton will start sixth and seventh, moving up one place each because of Webber's penalty.
The British pair looked good in dry weather but their cars, and tires, were not able to cope with the rain.
"I don't understand how everyone went that much quicker. I'm not sure what we did wrong," said Hamilton, who will be driving his 100th GP on Sunday.
"It means tomorrow's going to be a tough race, as it always is, but I plan to hunt down everyone that is in front of me."
Sauber's Mexican driver, Sergio Perez, was also dropped five places on the grid after qualifying in 12th, for impeding other cars, including Alonso's. Nico Rosberg of Mercedes and Romain Grosjean of Lotus have received the same five-place penalties for gearbox changes.