Miss Yousafzai became a household name after her campaigning for girls' right to education led to an assassination attempt by the Taliban two years ago, and has worked tirelessly as a human rights campaigner following her recovery.
The Pakistani schoolgirl, who now lives with her family in Birmingham, is the youngest ever to receive the Nobel Prize.
In a statement, the Nobel Peace Prize committee said: 'Despite her youth, Malala Yousafzai has already fought for several years for the right of girls to education, and has shown by example that children and young people, too, can contribute to improving their own situations.
'This she has done under the most dangerous circumstances.
'Through her heroic struggle she has become a leading spokesperson for girls' rights to education.'
Malala's first cousin Mehmood ul-Hassan said the whole family was delighted she had received the award.
'We cannot express the level of our happiness in words,' he told the Daily Telegraph.
'I just spoke to Ziauddin (Malala's father), and her mother. I also spoke to Malala, and they are all very excited and happy about this.
'Malala told me that Allah has blessed her with this award and she hopes this peace prize will help her cause (of educating girls), which is what she is focused on.'
Malala is expected to make her first statement after winning the prize when she has finished school for the day, at 4.30pm, the Malala Fund said.
PREVIOUS PEACE PRIZE WINNERS
2013 - Organisation for the Prohibition of Chemical Weapons
2012 - European Union
2011 - Ellen Johnson Sirleaf and Leymah Gbowee (Liberia)and Tawakkol Karman (Yemen)
2010 - Liu Xiaobo (China)
2009 - U.S. President Barack Obama (United States)
2008 - Martti Ahtisaari (Finland)
2007 - Intergovernmental Panel on Climate Change and Albert Gore(United States)
2006 - Muhammad Yunus and Grameen Bank (Bangladesh)
2005 - International Atomic Energy Agency and Mohamed ElBaradei(Egypt)
2004 - Wangari Muta Maathai (Kenya)
Miss Yousafzai was barely 11 years old when she began championing girls' education, speaking out in TV interviews.
The Taliban had overrun her home town of Mingora, terrorizing residents, threatening to blow up girls' schools, ordering teachers and students into the all-encompassing burqas.
She was critically injured in October 2012, when a Taliban gunman boarded her school bus and shot her in the head.
A bullet narrowly missed her brain and she was later airlifted to Britain for specialist treatment at the Queen Elizabeth Hospital in Birmingham, where she underwent numerous surgeries and made a strong recovery.
Malala currently lives with her father, mother and two brothers in Birmingham, attending a local school.
She has since written a book, I Am Malala, spoken to international audiences and on television and has been been showered with human rights prizes, including the European Parliament's Sakharov Award.
The Norwegian Nobel Committee announced that she had been jointly awarded the prestigious Peace Prize together with Indian children's rights activist Kailash Satyarthi.
Satyarthi, 60, has maintained the tradition of Mahatma Gandhi and headed various forms of peaceful protests, focusing on the grave exploitation of children for financial gain,' the Nobel committee said.
The Norwegian Nobel Committee cited the two 'for their struggle against the suppression of children and young people and for the right of all children to education
'We have awarded two people, from Pakistan and India, a Muslim and a Hindi, and it is in itself a strong thing,to join in a common struggle for education and against extremism,' Jagland said, adding that he thought the committee's decision would be well received around the world.
The Nobel Prizes in medicine, chemistry, physics and literature were announced earlier this week. The economics award will be announced on Monday.
All awards will be handed out on December 10, the anniversary of Nobel's death in 1896, the Peace Prize in Oslo, all others in Stockholm
Former Prime Minister Gordon Brown, who has campaigned with Malala on education issues since leaving office, said: 'Malala Yousafzai and Kailash Satyarthi are the world's greatest children's champions.
'They are two of my best friends and two of the greatest global campaigners who deserve the Nobel Peace Prize for their courage, determination and for their vision that no child should ever be left behind and that every child should have the best of chances.
'Kailash's life-long work in India fighting child labour - which I have had the privilege to see at first hand - complements Malala's work standing up for girls' rights to education, from Pakistan to the rest of the world
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