The Norwegian Nobel Committee awarded Obama the prize "for his extraordinary efforts to strengthen international diplomacy and co-operation between people".
The committee commended his vision for a world without nuclear weapons, saying: "The vision of a world free from nuclear arms has powerfully stimulated disarmament and arms control negotiations."
Obama - America's first black president - was elected last December, assuming office on 20 January, succeeding George W Bush. Nominations for the prize closed less than two weeks later, on 1 February.
Although it has been less than a year since he took office, the committee said that Obama had created a new climate in international politics, returning the US to multilateral diplomacy.
The citation said: "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 USA 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."
There were a record 205 nominations for the peace prize this year, including Zimbabwean prime minister Morgan Tsvangirai, Colombian senator Piedad Cordoba, Chinese dissident Hu Jia, French-Colombian politician Ingrid Betancourt and Afghan women's rights activist Simi Samar.
The citation continued: "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."
In his 1895 will, Alfred Nobel stipulated that the peace prize should go "to the person who shall have done the most or the best work for fraternity between the nations and the abolition or reduction of standing armies and the formation and spreading of peace congresses."
This has moved beyond peace mediation, to include work against poverty, disease, and climate change. The committee has famously made symbolic gestures intended to influence the world agenda. In the wake of the 1989 Tiananmen massacre, the Dalai Lama was awarded the prize.