Some patients who have faced incurable depression for decades have had symptoms disappear within hours of taking low doses of the drug.
The small trial on 28 people, reported in the Journal of Psychopharmacology, shows the benefits can last months.
Experts said the findings opened up a whole new avenue of research.
Depression is common and affects one-in-10 people at some point in their lives.
It really is dramatic for some people, it's the sort of thing really that makes it worth doing psychiatry” Lead researcher Dr Rupert McShane
Antidepressants, such as prozac, and behavioural therapies help some patients, but a significant proportion remain resistant to any form of treatment.
A team at Oxford Health NHS Foundation Trust gave patients doses of ketamine over 40 minutes on up to six occasions.
Eight showed improvements in reported levels of depression, with four of them improving so much they were no longer classed as depressed.
Some responded within six hours of the first infusion of ketamine.
Lead researcher Dr Rupert McShane said: "It really is dramatic for some people, it's the sort of thing really that makes it worth doing psychiatry, it's a really wonderful thing to see.
He added: "[The patients] say 'ah this is how I used to think' and the relatives say 'we've got x back'."
Dr McShane said this included patients who had lived with depression for 20 years.
"There are also some serious side-effects including one case of the supply of blood to the brain being interrupted."
But don't you fear depressed people. Forget about those pesky side effects that may cause irreversible damage and possibly death. Keep taking your happy pills and... just be happy ;)