Djokovic produced some sublime tennis to race through the opening two sets, and although top seed Nadal forced his way back into the match to win the third set, Serb Djokovic sealed a famous victory 6-4 6-11-6 6-3 in just over two-and-three-quarter hours.
Djokovic came into the tournament as the second seed, but was the in-form player of 2011 after losing just one match all year -- a run of form which ensured he would take the number one ranking on Monday regardless of the result of the final.
The pair had won the two previous grand slam events this season, Djokovic in Australia and Nadal in France, but the 24-year-old from Belgrade had won all four matches against Nadal this year -- all in tournament finals.
And he continued that form with a stunning start against two-time champion Nadal, who had not lost a match on the grass-court of the All England Club since his defeat to Roger Federer in the 2007 final, a 20-match winning streak.
A single break of serve gave Djokovic the first set, but an impressive double break ensured that the Serb raced away with the second in impressive style.
However, Nadal showed all the quality that had taken him to 10 grand slam titles in a glittering career by responding with a double break of his own to secure the third set in equally convincing fashion.
The big-hitting continued in the fourth set and an early break gave Djokovic a 2-0 advantage.
However, 25-year-old Nadal broke back straight away, courtesy of a fortunate net-cord, and the games went with serve until game eight, when Djokovic took the decisive final break before serving out to claim the title with his first match point.
"It's really hard to describe this with words but it is the best day of my life," Djokovic told the official Wimbledon website.
"I've always dreamed of this. That's probably my best match on grass, but I would like to congratulate Rafa for having a great tournament," added Djokovic, who has now won three grand slam titles after two victories in the Australian Open.
Nadal was gracious in defeat, adding: "I'd like to compliment Novak for his performance and his amazing season.
"Wimbledon is the most special tournament. I can imagine how Novak feels."
The result means that for the first time since 2002, when Australian Lleyton Hewitt beat David Nalbandian, somebody other than Nadal and Federer has won the men's singles title at Wimbledon.
It also continued a remarkable sequence in the men's singles, with the last four winners of the tournament all seeded second.