The Swedish Academy honoured Munro, 82, as a "master of the contemporary short story".
It hailed her "finely tuned storytelling, which is characterised by clarity and psychological realism. Some critics consider her a Canadian Chekhov."
"Her stories are often set in small town environments, where the struggle for a socially acceptable existence often results in strained relationships and moral conflicts -- problems that stem from generational differences and colliding life ambitions," it said.
Tipped as one of the favourites in the days before today's announcement, Munro is just the 13th woman to win the Nobel Literature Prize since it was first awarded in 1901. She is also the first Canadian to win the prestigious honour.
Munro will receive the prize sum of eight million Swedish kronor (USD 1.24 million). She will be presented with her award at a formal ceremony in Stockholm on December 10, the anniversary of prize founder Alfred Nobel's death in 1896.
Last year, the award went to Chinese novelist Mo Yan.