Halonen, Finland's first female president, had 51.8% of the vote, against 48.2% for Sauli Niinisto, a former finance minister. Turnout in the election on Sunday was 77%.
Halonen, 62, had been the clear favourite after winning the first round on 15 January with 46% of the votes against Niinisto's 24%.
But the gap closed in polls before Sunday's run-off as support surged for Niinisto, 57, a survivor of the December 2004 tsunami and vice-president of the European Investment Bank.
Since taking office in 2000, Halonen has enjoyed high approval ratings in the egalitarian country that was the first in Europe to give women voting rights. A former trade union lawyer, she is liked for her down-to-earth manner.
In their final debates, the contenders presented similar visions for neutral Finland's foreign policy - the president's primary domain.
Both advocate close ties with Nato, but Niinisto was considered more open to membership of the alliance, a sensitive issue in a country that shares a 1300km border with former enemy Russia.