Tony Blair said it was a "momentous day" as politicians celebrated London becoming host for the 2012 Olympics.
"It's not often in this job that you punch the air and do a little jig and embrace the person next to you," said the UK prime minister.
The Queen said it was an "outstanding achievement to beat such a highly competitive field".
Tory leader Michael Howard said he was "delighted" and Lib Dem leader Charles Kennedy said it would unite the nation.
London beat bookmakers' favourites Paris by just four votes in the final round of voting by the International Olympic Committee.
In a message to Lord Coe, the Queen said: "I send my warmest congratulations to you and every member of the London 2012 team for winning the bid for the UK."
Speaking at the G8 summit venue in Gleneagles, Mr Blair said he could not bring himself to watch the final part of the process and had been told the result by the Downing Street switchboard.
"We have got a great chance now to develop sport in our country and to have a fantastic Olympic Games and then to leave a legacy for the future," he said.
The prime minister saluted a team effort and said the work done by bid chairman Lord Coe and chief executive Keith Mills had been "just awesome".
Mr Blair said the costs for the bid would be met from business, the City and taxpayers.
"But this will pay dividends for all of us," he said.
Asked if he was surprised by the bid's success, Mr Blair said he had thought London had held an outside chance but had been impressed by the positive signals when he joined talks in Singapore this week.
Mr Blair was asked if the result could affect this week's G8 summit talks now French President Jacques Chirac would be disappointed by the news.
He said he had not yet spoken to Mr Chirac but did not believe it made the G8 talks harder.
"He [Mr Chirac] is someone who is deeply committed to Africa and supports what we are seeking on climate change," he added.
Arriving for the G8 summit, Mr Chirac said: "I am obviously - like all French women and men - disappointed by the decision of the committee," he said.
"My heartfelt congratulations to London and the London authorities, and I will have the chance soon to send my personal congratulations to Her Majesty the Queen and the Prime Minister Tony Blair."
New Lottery game
Culture Secretary Tessa Jowell has now been made minister for the Olympics alongside her current responsibilities.
Speaking in Singapore, she told reporters an Olympic Bill would be introduced in Parliament in the next few days.
The Olympic Lottery game which would help fund the games would also be launched soon, she said.
London Mayor Ken Livingstone said the games would be held in the "poorest part of Britain".
"We see the chance of the Olympics not just to give children all over the world the chance to achieve excellence but also to transform the chances of the children of the East End and break the cycle of poverty," he said.
In a Commons statement, Foreign Secretary Jack Straw said he was prouder than ever to be British.
"Today we can celebrate, from tomorrow we start to make the Olympic vision in our bid come true," said Mr Straw, who chaired the Cabinet committee on the bid.
Improvements to London's transport network would continue and major infrastructure contracts would be concluded in the next few weeks, said Mr Straw.
Conservative culture spokesman Theresa May predicted the event would help encourage sport and fight child obesity.
"We hope we can use these games to inspire a new generation to run faster, leap further and reach higher, to believe they can achieve their goals if only they dare to try," she said.
Mrs May said the Tories would ask detailed questions to ensure the games did not run over-budget and changes were delivered on time.
Lib Dem foreign affairs spokesman Sir Menzies Campbell said London's diverse culture set the right context for the games.
Sir Menzies, a former Olympic sprinter, added: "It is now our responsibility to take the opportunity and make sure we fulfil the obligation."
West Ham MP Lyn Brown said her constituency was absolutely delighted and the party would probably continue in Stratford for the next seven years.