The award-making committee said the prize honoured those behind recent unprecedented demonstrations in Iran and called for the release of Mohammadi, 51, who has campaigned for three decades for women's rights and abolition of the death penalty.
"We hope to send the message to women all around the world that are living in conditions where they are systematically discriminated: 'have the courage, keep on going'," Berit Reiss-Andersen, head of the Norwegian Nobel Committee, told Reuters.
"We want to give the prize to encourage Narges Mohammadi and the hundreds of thousands of people who have been crying for exactly 'Woman, Life, Freedom' in Iran," she added, referring to the protest movement's main slogan.
There was no immediate official reaction from Tehran, which calls the protests Western-led subversion.
Semi-official news agency Fars said Mohammadi had received her prize from the Westerners after making headlines due to her acts against the national security.
Mohammadi is serving multiple sentences in Tehran's Evin Prison amounting to about 12-year imprisonment, one of the many periods she has been detained behind bars, according to the Front Line Defenders rights organization.
Charges include spreading propaganda against the state.
She is the deputy head of the Defenders of Human Rights Center, a non-governmental organization led by Shirin Ebadi, the 2003 Nobel Peace Prize laureate.
"I congratulate Narges Mohammadi and all Iranian women for this prize," Ebadi told Reuters. "This prize will shed light on violation of women's rights in the Islamic Republic ... which unfortunately has proven that it cannot be reformed."
Mohammadi is the 19th woman to win the 122-year-old prize and the first one since Maria Ressa of the Philippines won the award in 2021 jointly with Russia's Dmitry Muratov.
Mohammadi's husband Taghi Rahmani applauded as he watched the announcement on TV at his home in Paris. "This Nobel Prize will embolden Narges' fight for human rights, but more importantly, this is in fact a prize for the 'women, life and freedom' movement," he told Reuters.
Arrested more than a dozen times in her life, and held three times in Evin prison since 2012, Mohammadi has been unable to see her husband for 15 years and her children for seven.
Her prize, worth 11 million Swedish crowns, or around US$1 million, will be presented in Oslo on December 10, 2023 the anniversary of the death of Swedish industrialist Alfred Nobel, who founded the awards in his 1895 will.
Past winners range from Martin Luther King to Nelson Mandela.
Mohammadi was quoted by the New York Times as saying she would never stop striving for democracy and equality, even if that meant staying in prison.
"I will continue to fight against the relentless discrimination, tyranny and gender-based oppression by the oppressive religious government until the liberation of women," the newspaper quoted her as saying in a statement.
Her award came as rights groups say that an Iranian teenage girl was hospitalized in a coma after a confrontation on the Tehran metro for not wearing a hijab.
Iranian authorities deny the reports.
Mohammadi's win also came just over a year after the death of Mahsa Amini in the custody of morality police for allegedly flouting the Islamic Republic's dress code for women.
That provoked nationwide protests, the biggest challenge to Iran's government in years, and was met with a deadly crackdown costing several hundred lives.
Among a stream of tributes from major global bodies, the UN human rights office said the Nobel award highlighted the bravery of Iranian women. "We've seen their courage and determination in the face of reprisals, intimidation, violence and detention," said its spokesperson Elizabeth Throssell .
"They've been harassed for what they do or don't wear. There are increasingly stringent legal, social and economic measures against them ... they are an inspiration to the world."
Dan Smith, head of the Stockholm International Peace Research Institute think tank, said that while the prize could help ease pressure on Iranian dissidents, it would be unlikely to lead to her release.
