The Swedish Academy's permanent secretary, Sara Danius, said Dylan, 75, "is a great poet in the English-speaking tradition." She drew parallels between his work and that of ancient Greek poets Homer and Sappho.
Although Dylan is not in the established canon of literary writers, Danius praised his creative output over five decades, including his constant reinvention of himself.
Asked where those unfamiliar with Dylan's work should start, Danius recommended his 1966 album Blonde on Blonde, saying it contained "many examples of his brilliant way of rhyming."
The award will certainly be a surprise for some. An article published in the New Republic on October 6 was headlined: "Who Will Win the 2016 Nobel Prize in Literature? Not Bob Dylan, that's for sure."
At that point, Dylan was given odds of 50/1 by bookmaker Ladbrokes to win the prize.
Bookmakers' favorites for 2016 included Japanese author Haruki Murakami, American novelist Philip Roth and Kenyan writer Ngugi wa Thiong'o but the actual list of nominees will be kept secret for 50 years.
His award will surely be welcomed by legions of fans around the world.
One Robyn Hitchcock, tweeted: "He launched me and many others on oceans of which we'd never dreamed..."
Dylan, 75, was born Robert Allen Zimmerman in Duluth, Minnesota, in 1941, and released his first album, "Bob Dylan," in 1962.
Since then, he's collected 10 Grammy Awards, including Album of the Year, one Golden Globe and one Academy Award.
In 2008, he won a Pulitzer Prize special citation for "his profound impact on popular music and American culture, marked by lyrical compositions of extraordinary poetic power."
He becomes the 108th winner of the most prestigious literature award in the world.