Directed by Fatih Atin, the film tells of the difficulties a second-generation Turkish family faces in the northern German city of Hamburg.
It was one of two German-produced contenders vying for the top prize at the 54th Berlinale, which ranks alongside Venice and just below Cannes among the world's top film festivals.
The Berlinale jury, chaired by Oscar winner Frances McDormand, on Saturday gave both South African actress Charlize Theron and Colombia's Catalina Sandino Moreno a Silver Bear for best actress after one of the fiercest competitions in recent memory in that category.
Theron plays a prostitute serial killer in Monster, a role for
which she has already been nominated for an Oscar, while Sandino Moreno stars as a drug mule in Maria Full of Grace.
The Silver Bear award for best actor went to Daniel Hendler for his role in Argentine director Daniel Burman's Lost Embrace, about a man looking for his father, a soldier in Israel.
Lost Embrace also won the runner-up Silver Bear award for best picture.
South Korea's Kim Ki-Duk won best director prize for his tragedy Samaritan Girl, about two schoolgirls who turn to prostitution.
Akin's Head-On beat out competition from 23 contenders. It is the first German film to win the top award since 1986, when Stammheim by Reinhard Hauff took home the Golden Bear.
The movie relates the generational and cultural conflict when
Cahit, a 40-year-old who abuses drugs and alcohol, meets the beautiful Sibel, 20, who is a prisoner of family traditions.
German or Turkish?
So was the film German or Turkish? "We are Germans, whether you like it or not," the 30-year-old director told reporters after this week's premiere.
The movie Cold Mountain has
received a lukewarm reception
The Berlinale, which kicked off on 5 February, was seen by many critics this year as having showcased moderately good but hardly spectacular films.
It opened with Cold Mountain, screened out of competition, and which won only a lukewarm reception.
Another eagerly-awaited movie, British director John Boorman's Country of My Skull about reconciliation in post-apartheid South Africa, fell flat due to what most critics called a lacklustre love story between Samuel L Jackson and Juliette Binoche.
The other German entry in competition, Nightsongs, had
arguably the worst reception, being met with boos and jabs for its director Romuald Karmakar.
Nicole Kidman and the other main stars of Cold Mountain, Renee Zellweger and Jude Law, set the tone by missing the film's screening in Berlin, although the latter two turned up briefly later in the 11-day event to apologise.
Jack Nicholson helped save the day with some trademark jesting with co-star Diane Keaton, while other top actors to appear included Theron, Robin Williams, Tim Roth and Cate Blanchett.
Other awards included a Silver Bear for outstanding artistic
contribution, given to the entire ensemble of Swedish director
Bjoern Runge's Daybreak.
Daybreak, a harrowing picture depicting three crumbling
families during a pivotal 24-hour period, also took the Blue Angel award for the best European film, endowed with 25,000 euros (32,000 dollars).
After the glittering awards ceremony later on Saturday, the event was to wrap up on Sunday with screenings of festival highlights open to the public.