Films such as Get Carter, arguably his finest performance, was recently remade by Sylvester Stallone, and The Italian Job has attained cult status.
The 67-year-old actor used his real name during the ceremony with the Queen, but will be known professionally as Sir Michael Caine
The double Oscar-winning star has already been awarded a CBE for his services to the British screen.
He still uses his real name, he revealed, as a tribute to his father.
"I was named after my father and I was knighted in his name because I love my father," he said .
"I always kept my real name - I'm a very private and family-orientated person."
He added: "When I go home, I leave Michael Caine the film star with the costumes, the wigs and the props in the studio."
The honour follows his second Oscar, awarded in March, and a Bafta fellowship, where he used his speech as a platform for his frustrations.
He told the audience that he felt like he never really belonged in Britain and that he was a loner and on the outside.
But Caine's knighthood confirms he has now been embraced as a fully-fledged member of the British establishment.
Born in Bermondsey, south-east London, he has always made a virtue of his working class background and his accent has resolutely refused to alter in his 40-plus years as an actor.
British icon
Caine was at the vanguard of British movies in the 1960s, playing the anti-hero spy Harry Palmer and the cockney Alfie.
In recent years many of his earlier films have been reassessed as true cinema classics.
Films such as Get Carter, arguably his finest performance, was recently remade by Sylvester Stallone, and The Italian Job has attained cult status.
Moments after kneeling before the Queen to be dubbed a Knight Bachelor for services to drama he said: "I never imagined that I would get a knighthood - you don't imagine being a film star either.
"Being knighted is an extraordinary honour for me. It's the recognition of a lifetime - this is the top one.
"It's like winning an Oscar - you don't expect it."
Sir Michael added: "The Queen said to me, 'I get the impression that you've been doing this for a very long time'."
Also receiving honours at the palace on Thursday were Mary Peters, who won an Olympic gold medal in 1972, and who becomes a Dame Commander, actress Dorothy Tutin, also a Dame Commander, and ex-England rugby international Jeremy Guscott, who received an MBE.
He said: "This means a great deal because, although I'm getting the award for rugby, it's a recognition of my individual contribution.
"This is something I can treasure and keep."
Before the investiture, the Queen presented a posthumous Bravery Medal to Laurence Whitehouse whose wife, Margaret, was taken hostage by Yemeni terrorists and died in a resulting shoot-out in 1998.
Mrs Whitehouse went to the aid of an injured Australian but both were killed in a hail of bullets.