Harvey was edged by Petter Northug in a photo finish when the Norwegian stretched out his ski to win gold.
It was Northug's 10th career world title but first in an individual sprint. He had a gap on Harvey entering the final stretch of the classical-style race but Harvey, from St-Ferreol-les-Neiges, Que., had the stronger finish over the last 50 metres, forcing the Norwegian to lunge forward at the line to hold off his rival.
Harvey won his fifth medal on the Falun course, where he earned his first career World Cup victory three years ago.
"I just love racing in Falun," said Harvey, who also won a silver at the Tour de Ski and last week. "The course is so hard and it requires sustained work, and I just enjoy racing here. I'm really excited. It was a great day for me and our entire team."
Olympic champion Ola Vigen Hattestad of Norway took bronze after beating Nikita Kriukov of Russia in a similar photo finish.
Len Valjas of Toronto had a solid race with a 14th-place finish, while Jesse Cockney, of Canmore, Alta., was 49th.
Harvey qualified fifth for the round of 30 after the head-to-head heats, then skied tactically through the next two rounds to secure his spot in the final.
"I went light on the kick wax in the qualifier. I didn't want 100 per cent grip because there are so many downhills into the finish, especially with this wet snow, but we had to make a choice so we went with the fast skis today," said Harvey. "That qualifier was a great start for me. In the quarter-final, I knew I was in it and I just said 'it is on now for me.'"
"I knew in the semis the Norwegians would go full blast. They had to with four guys in it. I just bit my teeth on the climbs and tried to be strong for the finish."
Making his move while drafting Northug into the finishing stretch of the final, Harvey said he just couldn't quite get by the Norwegian star.
"I was there with him in the end, and just couldn't get around him," said Harvey. "I thought I was going to get him. I wouldn't replay things to try it again. I am happy with the silver today and really looking forward to the rest of the week."
Earlier, Marit Bjoergen of Norway won the women's sprint.
Perianne Jones, of Almonte, Ont., finished 24th.