Kathryn Bigelow has become the first woman to win the best directing Oscar, as her Iraq war drama The Hurt Locker took six prizes, including best film.
"It's the moment of a lifetime," said Bigelow - only the fifth woman to be nominated in Academy Awards history.
She praised her fellow nominees "who have inspired me for decades", and paid tribute to those in the military.
Jeff Bridges and Sandra Bullock won the top acting Oscars for their roles in Crazy Heart and The Blind Side.
Mike Goodridge, Editor, Screen International
The Hurt Locker was deemed towards the end of the year as the "respectable" film to vote for. It's visceral, exciting, well made and captured the earnest vote that the academy like to cast for in a serious film.
I don't think the new voting system had anything to do with it winning as, by January, it was a two-horse race. The bigger issue is that the academy went for Hurt Locker over Avatar. Half the academy are actors who want to see brave performances and human stories.
But although Avatar is the most popular film of all time, which had great reviews and is beloved by audiences, science-fiction is a very unfashionable genre in the award stakes.
Avatar is the vision of a masterful mainstream film-maker where most of the film is animated sequences with computer-generated aliens at the core. There is an argument to say isn't that a more spectacular achievement than Hurt Locker?
Bridges, playing a hard-living country singer, beat George Clooney, Morgan Freeman, Jeremy Renner and Britain's Colin Firth to win with his fifth Academy Award nomination.
"Thank you mum and dad for turning me on to such a groovy profession," said a delighted Bridges, 60. "This is honouring them as much as it is me."
An emotional Bullock picked up the coveted best actress award, just a day after winning the Razzie for worst actress, for her role in All About Steve.
"Did I really earn this, or did I wear you all down?" she joked.
The 45-year-old praised her fellow nominees - including British newcomer Carey Mulligan, Dame Helen Mirren and the multiple nominee Meryl Streep - "who inspire me and who blaze trails for us all".
Honoured for her role as real-life Southern matriarch Leigh Anne Tuohy, she dedicated the award "to the mums who take care of the babies and children no matter where they come from," before paying tearful tribute to her own mother.
"To that trailblazer... I thank you so much for this opportunity that I share with these extraordinary women."
Christoph Waltz and Mo'Nique were the winners of the supporting acting awards, categories they were both widely tipped to win.
Waltz won for his role as a diabolical SS officer in Inglourious Basterds, while Mo'Nique triumphed for her role in Precious.
Bridges received an emotional tribute from former co-star Michelle Pfeiffer
"I would like to thank the Academy for showing that it can be about the performance and not the politics," said the 42-year-old comedian who beat Maggie Gyllenhaal, Anna Kendrick, Vera Farmiga and Penelope Cruz to the award.
"Sometimes you have to forego doing what's popular, in order to do what's right."
Nominated for her debut film role in Lee Daniels' harrowing drama, Mo'Nique has dominated the awards season with her devastating performance as abusive mother Mary.
Precious also picked up the best adapted screenplay award for screenwriter Geoffrey Fletcher.
Waltz was a little known TV and stage actor when he was cast by director Quentin Tarantino, but has won at nearly every major award ceremony since the film premiered at the Cannes Film Festival in May 2009.
"There's no way I can ever thank you enough," said the 53-year-old Austrian, paying tribute to Tarantino.
MAJOR OSCAR WINNERS
Best picture: The Hurt Locker
Best director: Kathryn Bigelow
Best actor: Jeff Bridges (Crazy Heart)
Best actress: Sandra Bullock (The Blind Side)
Best supporting actress: Mo'Nique (Precious)
Best supporting actor: Christoph Waltz (Inglourious Basterds)
Blockbuster Avatar and low-budget indie The Hurt Locker led the nominations as the ceremony commenced on Sunday, with nine nominations apiece, but James Cameron's 3D sci-fi juggernaut left with just three technical awards - for art direction, cinematography and visual effects.
Speaking on the red carpet ahead of the awards, Cameron paid tribute to Bigelow, to whom he was briefly married, and with whom he has made a number of films.
"I've extolled her virtues to the world and supported her as a film-maker. I'd be tremendously proud if she won."
"We feel we've already been sufficiently celebrated," he added, referring to Avatar's "tremendous box office and the nine nominations".
The Hurt Locker's screenwriter Mark Boal heralded the film's first success of the night, winning best original screenplay. Technical awards followed in film editing, sound editing and sound mixing.
Former journalist Boal paid tribute to the film-makers, cast and crew: "The results widely exceeded my expectations," adding "this belongs to one extraordinary and visionary individual, Kathryn Bigelow".
Mo'Nique thanked Hattie McDaniel, the first black woman to win an Oscar
For her part, Bigelow said: "I would not be standing here if it wasn't for Mark Boal, who risked his life for the words on the page."
Despite expanding the best picture category to 10 nominees, in an attempt to allow more populist films to feature at the ceremony, The Hurt Locker has made just $15m (£9.9m) at the box office, becoming the lowest-grossing film ever to win best picture.
Avatar, meanwhile, has become the biggest-grossing film in history, taking more than $2bn (£1.32bn) in the box office.
Argentina's The Secret In Their Eyes pulled off a surprise win for foreign-language film over higher-profile entries that included Austrian Cannes winner The White Ribbon and French prison drama A Prophet.
Critically acclaimed 3D film Up, also shortlisted in the best picture category, won best animated feature film.
"It was an incredible adventure making this movie, but the heart of it came from home," said director Pete Docter, paying tribute to his parents, wife and children. "You guys are the greatest adventure."
The animation also picked up the Oscar for best original score, for Michael Giacchino, who urged other would-be film-makers to "get out there and do it - it's not a waste of time".
OSCARS 2010: AS IT HAPPENS
Kathryn Bigelow tells the press she'd like to be the first of many female directors to win, and hopes to inspire film-makers of both sexes
Former Oscar winner Nick Park missed out on the award for best short animated film - for the Wallace and Gromit film A Matter of Loaf and Death - losing to French film Logorama.
However, costume designer Sandy Powell proved a rare British winner of the night, winning her third Oscar for her work on The Young Victoria.
A previous winner for The Aviator and Shakespeare in Love, she paid tribute to those costume designers who work on contemporary films which are often overlooked at awards ceremonies, but added the Oscar was "coming home with me".
Actors Steve Martin and Alec Baldwin hosted the ceremony - the first dual hosts in 23 years - in another bid to shake up the ceremony and drive up audience figures.
Oscar ratings fell to an all-time low two years ago.
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