"I do not feel that I deserve to be in the company of so many transformative figures that have been honoured by this prize," he said.
Speaking from the White House's Rose Garden, Obama confirmed that he would accept the award, but said he would not view it as "a recognition of my own accomplishments".
"I will accept the award as a call to action, a call to all nations to confront the challenges of the 21st century," he said.
Obama was awarded the prize "for his extraordinary efforts to strengthen international diplomacy and co-operation between peoples".
To gasps from those assembled, the Nobel committee chairman, Thorbjoern Jagland, said "only rarely has a person such as Obama captured the world's attention and given his people hope for a better future".
"His diplomacy is founded in the concept that those who are to lead the world must do so on the basis of values and attitudes that are shared by the majority of the world's population," the citation said.
The committee said Obama, who only took up the presidency in January, had been acknowledged for his calls to reduce the world's stockpile of nuclear weapons and working for world peace.
"Obama has as president created a new climate in international politics. Multilateral diplomacy has regained a central position, with emphasis on the role that the United Nations and other international institutions can play."
The choice of Obama for the prize from a field of more than 200 candidates astounded international commentators, in part because he took office less than two weeks before the February nomination deadline.
His name had been mentioned in speculation before the award but many Nobel watchers believed it was too early to award it to the president.
But Geir Lundestad, the secretary of the Norwegian Nobel Committee, said that Obama's emphasis on international co-operation, arms control and nuclear disarmament had "already had a very significant impact on international relations".
"We do of course hope that there will be many concrete changes over the years, but when a president makes all these changes on these ideals, which are the ideals the Norwegian Nobel Committee has had for 100 years, we felt it was right to strengthen him as much as we can in this further struggle for these ideals," he told the Guardian.
Michael Cox, a North America expert at the Chatham House thinktank, said: "It is difficult to see why it would be awarded to him at this stage in his presidency. There are problems in the Middle East and an ongoing war in Afghanistan. You could say it is a little bit premature. It is certainly a very interesting choice."
The award comes as Barack Obama considers sending up to 40,000 more troops to Afghanistan, where the US is mired in an eight-year conflict.
Jagland said that the ongoing war in Afghanistan should not obscure Obama's achievements. "The decision to go into Afghanistan had a unanimous UN mandate. The conflict concerns us all – this is not only the responsibility of Barack Obama," he told the Guardian. "Hopefully the improved international climate [Obama has fostered] could help resolve the conflict in Afghanistan."
Speculation over potential winners had focused on Zimbabwe's prime minister, Morgan Tsvangirai, a Colombian senator and a Chinese dissident, along with an Afghan women's rights activist.
The first African-American to hold the country's highest office, Obama has called for disarmament and attempted – so far without success – to restart the stalled Middle East peace process. The committee said that for 108 years it had sought to stimulate precisely the international policy and attitudes for which Obama is now the world's leading spokesman.
"The committee endorses Obama's appeal that 'now is the time for all of us to take our share of responsibility for a global response to global challenges'."
Former US presidents Theodore Roosevelt and Woodrow Wilson won the award in 1906 and 1919 respectively. Former president Jimmy Carter won the award in 2002 for his "decades of untiring effort to find peaceful solutions to international conflict".
Today, Carter described the awarding of the prize to Obama as a "bold statement of international support for his vision and commitment".
The announcement came as Obama's special envoy to the Middle East, George Mitchell's was meeting with the Israeli prime minister, Benjamin Netanyahu.
Many in Israel appeared perplexed by the decision but the country's leadership offered congratulations.
"I believe the Nobel prize will strengthen President Obama's ability to contribute to a comprehensive peace in the Middle East," the defence minister Ehud Barak.
Shimon Peres, who won the prize himself in 1994, said he was happy the prize committee chose to honour the "most unusual and far-reaching impact" of Obama's leadership.
The former US vice-president Al Gore shared the 2007 prize with the UN panel on climate change.
The prize, worth £880,000, will be awarded in Oslo in December.
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