Scientists Richard Axel and Linda Buck, who published their ground-breaking research in 1991, discovered a large gene pool containing the blueprint for sensors in the nose that identify smells wafting through the air and send signals to the brain.
They showed how the sense of smell helps recall memories of the scent of spring lilac in winter or the stench of rotten food eaten long ago.
Professor Sten Grillner of the Nobel Assembly said on Monday, "until Axel and Buck's studies, the sense of smell was a mystery".
Axel, 58, a Columbia University professor, and 57-year-old Buck of the Fred Hutchinson Cancer Research Centre in Seattle, discovered a family of 1000 different genes - 3% of the total in the human body - that give rise to an equivalent number of sensors in the nose that identify smells.
"I'm ecstatic, it's quite an honour," Axel told Swedish radio after winning half of the 10 million crown ($1.38 million) award from the Nobel Assembly of Sweden's Karolinska Institute.
The Nobel citation said their work had illustrated the role of the nose in distinguishing good and bad.
"A single clam that is not fresh and will cause malaise can leave a memory that stays with us for years and prevent us from ingesting any dish, however delicious, with clams in it.
Scientist Richard Axel said he was
ecstatic at winning the prize
"[On the other hand] we can consciously experience the smell of a lilac flower in the spring and recall this olfactory memory at other times."
The sensors, known as "olfactory receptor types", sit on cells in the back of the nose and identify smells.
Each receptor cell has only one type of sensor, but the sensors react to more than one odour, explaining why humans can detect and remember about 10,000 different smells.
Dogs, renowned for their acute sense of smell, have a scent area in the nose 40 times larger than a human's.
The receptor cells in turn send signals back to the parts of the brain responsible for smell.
The Nobel award said fish had around 100 odour sensors, while mice, which the two researchers studied, have about 1000.
Humans have a slightly smaller number than mice.
The Nobel prizes, first awarded in 1901, were created in the will of Swedish industrialist and inventor of dynamite, Alfred Nobel, who died in 1896.
Linda Buck and her colleague first
published their findings in 1991
They are presented in glittering ceremonies in Stockholm and Oslo on 10 December, the anniversary of his death.
The Nobel season continues with chemistry, physics, literature and peace prizes this week and economics next week.
Fellow researchers hailed Axel and Buck's work.
Going for coffee
"It has also prompted a lot of research into related areas such as taste," Professor Tim Jacob of Cardiff University in Wales, who also works on the sense of smell, said of the scientists' work.
Other experts said it was not immediately clear what practical use could be made of the discoveries for disorders such as having too much sense of taste or very little.
"Today we don't see any implications of this for the development of new pharmaceuticals but it could well be that will come," said Karolinska expert Professor Tomas Olsson.
Asked about his plans after the news Axel told Swedish radio from California: "I'm going to have a cup of coffee."