The Serb took nearly two-and-a-half hours to end Nadal's domination at the hallowed turf where he was on a 20 match winning streak.
It was Djokovic's third major title, having won the Australian Open in 2008 and earlier this year. He will also be the new number one, leaving Nadal at number two and breaking the seven-year domination of Roger Federer and Nadal at the top.
Djokovic is enjoying an astonishing run this year and has won 48 matches with his only loss coming against Roger Federer in the French Open semifinal.
It's was also Djokovic's fifth straight win over the Spaniard, all in title clashes.
Nadal was aiming for his 11th major and third Wimbledon title.
Djokovic is the first from his country to capture a Wimbledon title. As a Nadal backhand sailed over the baseline, Djokovic fell flat on his back before coming to terms with the victory.
'It is the best day of my life,' Djokovic said. 'This is the tournament I always dreamed of winning. I think I am still sleeping, still dreaming. When you're playing the best player in the world, I had to be on top of my game. I played probably my best match on grass courts ever,' he said.
Djokovic was flawless on serve and moved 5-4 and then stepped up his game to clsoe out the first set. At love-30 down, Djokovic struck two brilliant winners, one on each flank. Nadal then netted forehand to give the Serb his first set point that he converted.
Djokovic was relentless from the baseline, finding the angles that had Nadal scurring for the corners. Djokovic controlled the rallies, hitting deep and making Nadal commit errors. He carried on the momentum and raced through the second set.
Nadal then fought back with vengeance. He counterattacked and broke Djokovic early in the third set. Nadal then won three service games to love and again broke Djokovic for a second time when the Serb made his first double fault.
Djokovic went 2-0 up in the fourth set. He first survived a break point to hold serve and then a perfect drop volley set up another break of the Nadal serve. Nadal's response was to break Djokovic and to go on to level at 2-2 but the tough Spaniard was slowly showing signs of cracking down in the tense fourth set. Nadal dropped his serve in the eighth game, and Djokovic served out the match.
A gentleman as ever, Nadal took the defeat in his stride. 'I'd like to compliment Novak for his performance today and his amazing season. Wimbledon is the most special tournament. I can imagine how Novak feels.'