Scientists believe the workings of the formulation could hold the key to a new generation of cheaper, more effective drugs against a disease that kills about a million people and infects several more millions each year.
"We are particularly pleased to have found the missing piece in the anti-malarial jigsaw and solved one of the longest-running mysteries about how a critical anti-malarial works," researchers said on Wednesday.
The herb, inspiring present day scientists, dates back to AD340, when a Taoist scribe wrote a 'Handbook of Prescriptions for Emergency Treatments', giving a recipe for using sweet wormwood in an infusion for treating fever.
"The ever-growing threat of resistance to antimalarial drugs gives the work ... a practical significance beyond its undoubted academic merit"
Robert Ridley, WHO tropical disease expert
More than 1,200 years later, a Chinese sage, Li Shizen, realised the recipe could be used for treating malaria and began using it.
But it was not until 1972 that the herb began attracting present-day scientists.
They successfully extracted the plant's active compound, artemisinin and began using it as well.
Artemisinin has since become a leading medication against the malaria parasite, but it has never been clear how it works.
However,scrientists now believe they have finally unravelled the mystery, raising hopes for far effective treatment against malaria.
After long years of research, Sanjeev Krishna, of St George's Hospital Medical School in London, asserts he has found out how artemisinin works.
He says it works by blocking the action of a metablolic enzyme called PfATP6 that is vital for "pumping" calcium in and out of the malaria parasite's cell.
All complex cells need calcium "pumps" to drive their molecular motors.
The finding has set the scientist community abuzz.
It has opened up a window of opportunity in the battle against malaria and scientists say by targetting PfATP6, the parasite could be neutralised.
"The ever-growing threat of resistance to antimalarial drugs gives the work of Krishna and colleagues a practical significance beyond its undoubted academic merit," Robert Ridley, a tropical disease expert of the WHO said.