The Nobel Academy described the novelist, whose work has often focused on the Nazi occupation of France, as “a Marcel Proust of our time”.
The award – presented to a living writer – is worth eight million kronor (£691,000).
Previous winners include literary giants such as Rudyard Kipling, Toni Morrison and Ernest Hemingway.
At a press conference in Paris, the publicity-shy Modiano expressed his surprise at the win and said he was keen to find out why he was chosen.
“I wasn’t expecting it at all,” he said. “It was like I was a bit detached from it all, as if a doppelganger with my name had won.”
Modiano beat bookies’ favourites Japanese writer Haruki Murakami and Kenyan novelist, poet and playwright Ngugi wa Thiong’o. The last French writer to win the prize was Jean-Marie Gustave Le Clezio in 2008.
The academy said the award was “for the art of memory with which he has evoked the most ungraspable human destinies and uncovered the life-world of the occupation”.
“This is someone who has written many books that echo off each other… that are about memory, identity and aspiration,” Peter Englund, the academy’s permanent secretary said.