Hu Jintao, the Chinese president, launched the service at a ceremony in Golmud in the western Chinese province of Qinghai on Saturday.
"This is a magnificent feat by the Chinese people, and also a miracle in world railway history," Hu told an audience that included yellow-helmeted workers who built the line.
He said it showed that China's people were "ambitious, self-confident and capable of standing among the world's advanced nations".
Musicians in traditional Chinese and Tibetan costumes banged drums and cymbals as Hu cut a ceremonial ribbon with a pair of golden scissors.
Later, about 900 passengers left Golmud on the 1,142km (708 miles) service's first departure to the Tibetan capital, Lhasa.
The journey will take passengers more than 5000m (16,737ft) and carry extra oxygen supplies to help passengers cope with the thin air.
Activists complain that the railway will bring an influx of Chinese migrants, damaging Tibet's fragile ecology and diluting its unique Buddhist society.
They say most of its economic benefits will go to migrants from the east.
On Friday, three women from the United States, Canada and Britain were detained after unfurling a banner at Beijing's main train station reading, "China's Tibet Railway, Designed to Destroy."
The railway is projected to help double tourism revenues in Tibet by 2010 and reduce transport costs for goods by 75%, according to the government's Xinhua News Agency.