Wimbledon - Djokovic beats Nadal to win Wimbledon
The Serb, who had secured the top ranking just be reaching the final, playing sublime tennis for the first two sets before defending champion Nadal hit back in the third.
But Djokovic, who has lost just one match so far this year - the French Open semi-final to Roger Federer - had too much for his opponent in the long run and secured the title after two hours and 28 minutes when a forehand sailing long from the Spaniard.
"This is the best day of my life, this is the tournament I always dreamed of winning," Djokovic said following the presentation ceremony.
"When you are playing the best player in the world, Rafa Nadal, I had to play at the top of my game and I think I played my best match on grass."
The victory, Djokovic's fifth over the Spaniard in finals this year, also marks the first occasion 10-times major champion Nadal has lost in a Grand Slam final to anyone other than Roger Federer.
A 20-stroke rally in just the second point of the game, won by Nadal when he rattled a forehand winner down the line, hinted at the quality of level to play as both men came bursting out of the traps.
With the top two players in the world squaring up against each other, the first set was suitably cagey, both men trading holds without even the merest hint of a break point.
Nadal enjoyed a marginally more comfortable time on serve in the early stages but neither man were able to make too many inroads into their opponent's game
Playing with the confidence of a man who had won 47 of 48 matches this year heading into the final, Djokovic stepped up his level at the key time in the first set, breaking Nadal in the 10th game to seal it.
A ferocious cross court forehand from the Serb came out of nowhere and left Nadal rooted to the spot to kick-start Djokovic's campaign in that 10th game, the 24-year-old going on to win four straight points and seal the set when Nadal sent a forehand spinning long.
An inspired Djokovic then romped through the second set; breaking in the second game, with a backhand winner off a brilliant drop shot from Nadal, and again in the sixth, when the Spaniard hit wide, before serving out with ease.
Having been completely outplayed in the second set, Nadal showed his champions mentality by somehow turning things around in the third set, inflicting as one-sided a set on Djokovic as he had just been subject to himself.
Nadal broke in the second game after and as an increasing number of errors began to creep into Djokovic's game, the Spaniard broke for a second time in the sixth game when the second seed dumped his first, and only, double fault of the match into the net.
A comfortable hold to seal the set from Nadal ensure that the third set followed the template of the second and left the match intriguingly poised at two sets to one in favour of Djokovic.
Despite looking like the pressure was beginning to tell, Djokovic grabbed the early lead in the fourth set when he broke in the second game with a series of huge cross court forehands eventually drawing the error from Nadal.
The Spaniard broke back immediately, increasing the power on his ground-strokes to put Djokovic off, before getting a fortuitous net cord to see his back-sliced forehand return of serve roll over the net for the perfect drop shot winner.
If anything it looked as though Nadal would go on to push the match to five sets, the Serb continuing to look a little rattled by Nadal's ability to keep bouncing back.
But Djokovic continued to hold and stay just out in front before pouncing on a poor service performance from Nadal in the eighth game and snatching the advantage just as he had done in the first set.
Nadal opened the game with his only double fault of the match and never really recovered, first handing Djokovic three break points with a forehand into the net, and then the game with a backhand long.
The Serb looked far from confident serving for the title and he quickly found himself 0-15 down after a nervy forehand error and then locked at 30-30 with a backhand long.
But Djokovic steadied his nerve just in time, earning himself a championship point with a huge first serve and backhand volley winner, before serving out with another solid serve that Nadal could only return long.