The award, announced in Oslo by the Nobel Committee while much of official Washington - including the President - was still asleep, cited in particular the President's efforts to rid the world of nuclear weapons.
"He has created a new international climate," the committee said.
For Obama, one of the nation's youngest Presidents, the award is an extraordinary recognition that puts him in the company of world leaders such as Mikhail Gorbachev, who won for helping to bring an end to the Cold War, and Nelson Mandela, who sought an end to apartheid. But it is also a potential political liability at home; already, Republicans are criticizing the President, contending he won more for his "star power" than his actual achievements.
In a late-morning appearance in the Rose Garden, Obama said he was "surprised and humbled" by the award, and that he did not feel he deserved to be in the company of some of the "transformative" figures who had previously won it.
"Let me be clear, I do not view it as a recognition of my own accomplishments, but rather as an affirmation of American leadership on behalf of aspirations held by people in all nations," the President said.
The news shocked people in Oslo - where an audible gasp escaped the audience when the decision was announced - and in Washington, where top advisers to Obama said they had no idea it was coming. The President was awakened shortly before 6 am by his press secretary, Robert Gibbs, who delivered the news.
"There has been no discussion, nothing at all," said Rahm Emanuel, the President's chief of staff, in a brief early morning telephone interview.
Rebuke to Obama's predecessor
In one sense, the award was a rebuke to the foreign policies of Obama's predecessor, George W Bush, some of which the President has sought to overturn. Obama made repairing the fractured relations between the United States and the rest of the world a major theme of his campaign for the presidency. Since taking office as President he has pursued a range of policies intended to fulfill that goal. He has vowed to pursue a world without nuclear weapons, as he did in a speech in Prague earlier this year; reached out to the Muslim world, delivering a major speech in Cairo in June; and sought to restart peace talks between Israel and the Palestinians.
"Only very rarely has a person to the same extent as Obama captured the world's attention and given its people hope for a better future," the committee said in its citation. "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."
But while Obama has generated considerable good will overseas - his foreign counterparts are eager to meet with him, and polls show he is hugely popular around the world - many of his policy efforts have yet to bear fruit, or are only just beginning to do so. North Korea has defied him with missile tests; Iran, however, recently agreed to restart nuclear talks, which Obama has called "a constructive beginning."
In that sense, Obama is unlike past recipients of the Nobel Peace Prize such as former President Jimmy Carter, who won in 2002 for what presenters cited as decades of "untiring efforts" to seek peaceful end to international conflicts. (Carter failed to win in 1978, as some had expected, after he brokered a historic peace deal between Israel and Egypt.)
Thorbjorn Jagland, the chairman of the Norwegian Nobel Committee and a former prime minister of Norway, said the President had already contributed enough to world diplomacy and international understanding to earn the award.
"We are not awarding the prize for what may happen in the future, but for what he has done in the previous year," Jagland said. "We would hope this will enhance what he is trying to do." The prize comes as Obama faces considerable challenges at home. On the domestic front, he is trying to press Congress to pass major legislation overhauling the nation's health care system. On the foreign policy front, he is wrestling with declining support in his own party for the war in Afghanistan. The White House is engaged in an internal debate over whether to send more troops there, as Obama's commanding general has requested.
For Obama, the award could, in a strange way, prove a political liability. As he traveled overseas during his campaign for the presidency, he was subjected to criticism from Republicans who argued he was too much the international celebrity. Winning the Nobel at such an early stage in his presidency could further that kind of criticism, especially in Washington's hyperpartisan political environment.
Even before Obama appeared in the Rose Garden to discuss the award, he was facing criticism from the chairman of the Republican National Committee, Michael Steele.
"The real question Americans are asking is, 'What has President Obama actually accomplished?' It is unfortunate that the president's star power has outshined tireless advocates who have made real achievements working towards peace and human rights," Steele said in a statement. "One thing is certain - President Obama won't be receiving any awards from Americans for job creation, fiscal responsibility, or backing up rhetoric with concrete action."
Obama also suffered a rejection on the world stage when he traveled to Copenhagen only last Friday to press the United States' unsuccessful bid to host the Olympics in Chicago. Emanuel, who heard the news at 5 am when he was heading out for his morning swim, said he joked to his wife, "Oslo beats Copenhagen."
But rebuffs have been rare for Obama as he has traveled the world these past nine months - from Africa to Europe, Latin America and the Middle East, with a trip to Asia planned for November.
In April, just hours after North Korea tested a ballistic missile in defiance of international sanctions, he told a huge crowd in Prague that he was committed to "a world without nuclear weapons."
In June, he traveled to Cairo, fulfilling a campaign pledge to deliver a speech in a major Muslim capital. There, in a speech that was interrupted with shouts of, "We love you!" from the crowd, Obama said he sought a "new beginning" and a "fresh relationship" based on mutual understanding and respect.
"I am convinced that in order to move forward, we must say openly the things we hold in our hearts, and that too often are said only behind closed doors," the President said then. "There must be a sustained effort to listen to each other, to learn from each other, to respect one another, to seek common ground."
Obama's foreign policy has been criticized bitterly among neo-conservatives like former Vice President Dick Cheney, who have suggested his rhetoric is naive and his inclination to talk to America's enemies will leave the United States vulnerable to another terrorist attack.
In its announcement of the prize, the Nobel Committee seemed to directly refute that line of thinking.
"Obama has as President created a new climate in international politics," the committee wrote. "Multilateral diplomacy has regained a central position, with emphasis on the role that the United Nations and other international institutions can play."
Interviewed later in the Nobel Committee's wood-paneled meeting room, surrounded by photographs of past winners, Jagland brushed aside concerns expressed by some critics that Obama remains untested.
"The question we have to ask is who has done the most in the previous year to enhance peace in the world," Jagland said. "And who has done more than Barack Obama?"
He compared the selection of Obama with the award in 1971 to the then West German Chancellor Willy Brandt for his "Ostpolitik" policy of reconciliation with communist eastern Europe.
"Brandt hadn't achieved much when he got the prize, but a process had started that ended with the fall of the Berlin Wall," said Jagland. "The same thing is true of the prize to Mikhail Gorbachev in 1990, for launching perestroika. One can say that Barack Obama is trying to change the world, just as those two personalities changed Europe."
"We have to get the world on the right track again," he said. Without referring specifically to the Bush era, he continued: "Look at the level of confrontation we had just a few years ago. Now we get a man who is not only willing but probably able to open dialogue and strengthen international institutions."
Obama is the third leading American Democrat to win the prize this decade, following former Vice President Al Gore in 2007 along with the UN climate panel and former President Jimmy Carter in 2002.
The last sitting American President to win the prize was Woodrow Wilson in 1919. Theodore Roosevelt was selected in 1906 while in the White House and Carter more than 20 years after he left office.
The prize was won last year by the former President of Finland, Martti Ahtisaari for peace efforts in Africa and the Balkans.
The prize is worth the equivalent of $1.4 million and is to be awarded in Oslo on December 10.
The full citation read: "The Norwegian Nobel Committee has decided that the Nobel Peace Prize for 2009 is to be awarded to President Barack Obama for his extraordinary efforts to strengthen international diplomacy and cooperation between peoples. The committee has attached special importance to Obama's vision of and work for a world without nuclear weapons.
"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. Dialogue and negotiations are preferred as instruments for resolving even the most difficult international conflicts. The vision of a world free from nuclear arms has powerfully stimulated disarmament and arms control negotiations. Thanks to Obama's initiative, the United States is now playing a more constructive role in meeting the great climatic challenges the world is confronting. Democracy and human rights are to be strengthened."