Liverpool has been named European Capital of Culture 2008 by Culture Secretary Tessa Jowell.
The news was greeted with cheers in Liverpool
The city beat five other hopefuls - Bristol, Birmingham, Cardiff, Newcastle-Gateshead and Oxford - to win the coveted prize.
The announcement was greeted by scenes of jubilation in Liverpool and subdued disappointment in the losing cities on Wednesday morning.
The title is expected to attract more tourists, increase investment and create jobs, as well as boost the profile of the winning city.
Ms Jowell said the competition had been "fantastic" with all the bids being of the highest standard.
She praised the Liverpool bid for having an edge over rivals as it "embraced the whole city".
"Liverpool was the most vital, energetic bid," she said.
Sir Jeremy Isaacs, head of the panel of independent judges, said Liverpool's stunning dockside developments, city centre and strong visual arts had boosted its bid.
"Taken overall, Liverpool looked good, sounded good, feels good to be in and would deliver a really terrific year," he said.
"If one had to say one thing that swung it for Liverpool, it would have to be there was a greater sense there that the whole city is involved in the bid and
behind the bid."
City council chief executive David Henshaw described the win as "staggering" for the city.
"The city is growing up. We've got history and we should be proud of our history, but in the past we've been prisoners of our history," he said.
"It's a momentous day for Liverpool because it's about looking forward."
The leader of Liverpool City Council, Councillor Mike Storey, said: "This is like Liverpool winning the Champions League, Everton winning the double and the Beatles reforming all on the same day - and Steve Spielberg coming to the city to make a Hollywood blockbuster about it."
Liverpool promoted itself with the slogan "The world in one city".
It placed culture, creative industries and tourism at the heart of its regeneration project for 2008.
The renewal of its waterfront, a World Heritage site, and cultural centres like Tate Liverpool strengthened its credentials.
It is also home to the recently opened Film Arts and Creative Centre, FACT, the UK's only exhibition and performance space dedicated to film, video and digital art.
The team promoting Liverpool's bid said it has prepared a detailed plan to deliver "the most spectacular celebration of culture" in the history of Europe.
It promises a year-long festival featuring art, architecture, ballet, comedy, cinema, food, fashion, literature, music, opera, science and theatre.
The rivalry between those selected has been fierce, owing to the benefits previous holders of the title have received.
The UK's last City of Culture - Glasgow in 1990 - saw a massive increase in tourism as a result of winning the title.
Six cities were chosen from a dozen hopefuls last October to vie for the accolade.
The European Union (EU) has designed the Capital of Culture programme to replace the City of Culture status which began with Athens in 1985.
The first Capital will be Cork in the Republic of Ireland in 2005, followed by Patras in Greece in 2006 and Luxembourg a year later.
Disappointed Newcastle-Gateshead bid organisers congratulated Liverpool and said the bid process had given the city "a kickstart".
"We've lost the boost that the Capital of Culture title would have given us, but the plans will go ahead," an organiser said.
Newcastle-Gateshead were frontrunners with bookmakers highlighting the innovative Millennium Bridge, the multi-million pound Baltic Centre for contemporary art and the under-construction Sage Music Centre as potential selling points.
Brushing aside its image as the industrial heartland, Birmingham stressed its experience, expertise and ethnic diversity in its bid.
Even Bollywood stars were enlisted to boost the city's rich ethnic mix.
Bristol was described as a city that appealed to both tourists and locals.
The Welsh city of Cardiff said its experience hosting events at the Millennium Stadium would make it the ideal capital of culture.
Under the slogan Oxford Inspires, the university town proposed a Festival of Walks through the Oxfordshire countryside, a Freshwater Festival and a Food and Countryside Festival in its bid.