The 18 lifetime members of the 217-year-old Swedish Academy made the annual selection amid a total press blackout at one of their weekly meetings. The prize includes a cheque of 10 million kronor ($1.3 million).
More important for some, it can also bestow increased sales, celebrity and professional admiration. Syrian poet Ali Ahmad Said, better known as Adonis, had been the favourite for the prize.
Coetzee becomes the fourth African writer since 1980 to win the prestigious award.
Coetzee “in innumerable guises portrays the surprising involvement of the outsider,” the Academy said.
“But at the same time, he is a scrupulous doubter, ruthless in his criticism of the cruel rationalism and cosmetic morality of Western civilisation,” it added.
Coetzee was born in February 1940 and until recently was a professor of general literature at the University of Cape Town.
The South African follows in a long and highly distinguished line of authors to win the prize. Past victors include VS Naipaul of Britain, Gao Xingjian of France, Guenter Grass of Germany and acclaimed playwright Dario Fo.
"He is a scrupulous doubter, ruthless in his criticism of the cruel rationalism and cosmetic morality of western civilisation”
Coetzee was also the first writer to win the Booker prize twice, being awarded literature's second most coveted prize in 1983 with The Life & Times of Michael K and again in 1999 with Disgrace.
Next week a number of different Nobel prizes will be announced. On Monday, the winner of the medicine award will be named, followed on Tuesday by physics and Wednesday by chemistry and economics.
The Nobel Peace Prize, the only one not to be awarded in Sweden, is announced on 10 October in Oslo.
Alfred Nobel was a Swedish industrialist and the inventor of dynamite.
He gave only vague guidance about the literature prize, saying that it should go to those who “shall have conferred the greatest benefit on mankind” and “who shall have produced in the field of literature the most outstanding work in an ideal direction.”
The prizes will be presented on 10 December, the anniversary of Nobel's death in 1896.