The gene to make GFP is inserted into the DNA of lab animals, bacteria or other cells, where it is "switched on" by other genes.
The glow becomes apparent under ultraviolet light.
The telltale protein gives researchers an instant way of monitoring processes that were previously invisible.
By tagging nerve cells, scientists can for instance follow the destruction caused by Alzheimer's disease. Tumour progression can be followed by adding GFP to cancer cells.
By adding GFP to a growing mouse embryo, they can see how the pancreas generates insulin-producing beta cells.
In one spectacular experiment, researchers made a "brainbow", in which they tagged different nerve cells in the brain of a mouse with a kaleidoscope of colours.
Shimomura, born in 1928 and now a professor emeritus at Marine Biological Laboratory (MBL) and Boston University, pioneered this tool with a study of the jellyfish Aequorea victoria in the 1960s.
He isolated a few precious grams of luminescent liquid from 10,000 jellyfish, which led to the discovery that its source was GFP, a so-called chromophore - a chemical group that absorbs and emits light.
Shimomoura was the third Japanese citizen to win a Nobel this year, after Makoto Kobayashi and Toshihide Maskawa won the Physics Prize Tuesday along with Japanese-born American Yoichiro Nambu for groundbreaking theoretical work in fundamental particles.
|From left to right: Prize winners, Chalfie, Shimomura and Tsien [AFP]
"Honestly, I am surprised to see so many as four Japanese win in one year," Taro Aso, Japan's prime minister, said on Wednesday.
"It's really good."
Chalfie, born in 1947 and a biology professor at Columbia University, followed up on Shimomura's research.
He helped identify the gene that controls GFP and found ways of inserting it into a common lab tool, the millimetre-long roundworm called Caenorhabditis elegans.
His idea was that by connecting the gene for GFP with various gene switches, or promoters, he would be able to see where different proteins were produced -"The green light would act as a beacon for various events."
Tsien, born in 1952 and a professor at the University of California, completed the final step, developing new variants of GFP that shine more strongly and in different colours, allowing researchers to mark different proteins in different colours to see their interactions.
"Today, GFP is a standard tool for thousands of researchers all over the world," the Nobel panel said.
GFP inserted in bacteria has also been adapted to make sensors that glow in the presence of arsenic - a major problem in groundwater in Bangladesh - and TNT.
Tsien said he was surprised to have won the prize.
"There have been rumours, but I was a little surprised anyway," he told Swedish news agency TT.
He said he was very honoured, but pointed out that in addition to Wednesday's three winners a number of other researchers had also contributed to discovering the revolutionary uses of GFP.
|A 'hu-mouse' embryo - human embryonic stem cells illuminated by GFP [AFP]
"The research environment in La Jolla [California] has spurred me and my colleagues on and allowed us to succeed in our efforts," he said.
Bruce Bursten, president of the American Chemical Society, hailed the choice of this year's laureates, saying it "showcases chemistry's critical but often-invisible role in fostering advances in biology and medicine".
"This is chemistry at its very best, improving people's lives," Bursten said.
The Nobel medicine and physics prizes were announced earlier this week, while the Literature Prize is due on Thursday and the Peace Prize on Friday.
The Economics Prize will wrap up the awards on October 13.
Laureates receive a gold medal, a diploma and 10 million Swedish kronor ($1.42 million), which can be split between up to three winners per prize.
The formal prize ceremonies will be held in Stockholm and Oslo on December 10.