Amrozi bin Nurhasyim was accused of conspiring, planning and carrying out an act of terrorism, which killed more than 200 people.
The defiant man smiled as the guilty verdict was read out. He then turned around to the crowded courtroom and gave the thumbs-up sign as the judge delivered the death sentence.
Chief Judge I Made Karna described last October's attacks in which 202 people, mainly tourists, were killed, as a "crime against humanity".
Amrozi, dubbed the laughing bomber, smiled broadly and shook his fists in the air after hearing the sentence. He again smiled and shook his fists in apparent triumph as police led him out of court.
Amrozi's lawyers vowed to appeal the ruling, saying that "capital punishment is an act of revenge".
It is the first verdict to be issued over the Bali bombings of two crowded nightclubs.
Amrozi is one of
dozens of suspects
Judge Karna said the notion of "jihad" is "often misinterpreted by people with a narrow mindset. Jihad holds a high meaning in Islam. Islam is a religion that teaches love".
Family and friends of the victims hugged and kissed after the sentence was issued.
Other key suspects, including two of Amrozi's brothers, will also face a verdict in the coming weeks.
“Burn, burn the Jews,” a defiant Amrozi had shouted earlier.
Amrozi's family condemned the court's decision, saying it would be difficult for them to accept the death sentence.
Speaking from their home village of Tenggulun in Central Java, the family blamed outside pressure for the sentence.
Indonesia is eager to score political points on the international front to show the world it is committed to bringing perpetrators to justice.
Amrozi has admitted involvement in the attacks during the trial and once notoriously declared “whites” deserved to die.
But the mechanic has also said he does not belong to the Jamaa Islamiyya network that police blame for the Bali bombings.
Indonesian police are pointing the finger at the group for Tuesday’s blast at a Jakarta Marriott Hotel which left at least 14 people killed.