It was the first time in 74 years the prestigious $1.4 million award was not handed over, because Liu is serving an 11-year sentence in China on subversion charges for urging sweeping changes to Beijing's one-party communist political system.
China was infuriated when the 54-year-old literary critic won, describing the award as an attack on its political and legal system. Authorities have placed Liu's supporters, including his wife, Liu Xia, under house arrest to prevent anyone from picking up his prize.
In China, both CNN and BBC TV channels went black at 8 p.m. local time for nearly an hour, exactly when the Oslo ceremony took place. Security outside Liu's Beijing apartment was heavy and several dozen journalists were herded by police to a cordoned-off area.
In his speech, Norwegian Nobel Committee Chairman Thorbjorn Jagland called for Liu's release, receiving an unusual standing ovation at the international gathering.
"He has not done anything wrong. He must be released," Jagland said. He noted that neither Liu nor his closest relatives were able to attend the ceremony.
"This fact alone shows that the award was necessary and appropriate," Jagland said.
Liu's Nobel diploma and medal were placed on the empty chair marking his absence.
Norwegian actress Liv Ullman read Liu's statement, "I Have No Enemies," which he delivered in a Chinese court in 2009 before he was jailed.
The Chinese Foreign Ministry described the award as a "political farce" and said it reflected Cold War mentality and infringed upon China's judicial sovereignty.
"(It) does not represent the wish of the majority of the people in the world, particularly that of the developing countries," ministry spokeswoman Jiang Yu said in Beijing.
A group of prominent international figures, all former Nobel Peace Prize winners,from jail and have offered to mediate negotiations to do so.
The Nobel group signed a pledge that stated: "We commend the People's Republic of China for the expansion of economic freedom that has vastly improved the lives of hundreds of millions of Chinese citizens. We believe that the broader extension of human freedoms would further contribute to the success and happiness of the Chinese people. We would accordingly appreciate the opportunity of engaging with the Government of the People's Republic of China to discuss the status of Liu Xiaobo and to establish what steps might be taken to facilitate his early release from detention."
U.S. President Barack Obama, who was awarded the peace prize last year, also added his voice to the chorus of Liu supporters. In a statement, Mr. Obama stressed the importance of democracy and the rule of law and said that Liu stands for universal human values and should be released from prison as soon as possible.
Mr. Obama said he regrets that Liu and his wife are being denied the ability to attend the ceremony, adding that "Liu Xiaobo is far more deserving of this award than I was."
The last time a Nobel Peace Prize was not handed out was in 1936, when Adolf Hitler prevented German pacifist Carl von Ossietzky from accepting his award.
The German media - which by then had been brought thoroughly under Nazi control - initially stayed silent on the award, but then German newspapers reported on it in overwhelmingly negative terms on Nov. 25, said Johannes Tuchel, a professor with the German Resistance Memorial in Berlin. The papers described the award as a scandal and Ossietzky as a traitor.
China had pressured foreign diplomats to stay away from the Nobel ceremony, with 17 other countries joining their boycott, including Russia, Pakistan, Iran, Venezuela and Cuba. At least 46 of the 65 countries with embassies in Oslo accepted invitations.
Some 1,000 guests, including ambassadors, royalty and other VIPs sat solemnly in atrium hall of Oslo's modernist City Hall for the ceremony, applauding occasionally during the speeches.
U.S. House Speaker Nancy Pelosi, who attended with U.S. Ambassador Barry White, told The Associated Press that it was "an honor" for her to be there.
"It is really a joy of my official life. For decades we have worked for human rights in China and Liu Xiaobo has been a hero to all of us," she said.
About 100 Chinese dissidents in exile and some activists from Hong Kong also attended. Chinese dissident Wan Yanhai, the only one on a list of 140 activists in China invited by Liu's wife to attend the ceremony, said the jubilation felt by many at Liu's honor will be tinged with sadness.
"I believe many people will cry, because everything he has done did not do any harm to the country and the people in the world. He just fulfilled his responsibility," Wan told AP. "But he suffered a lot of pain for his speeches, journals and advocacy of rights."
Wan managed to travel to Oslo because he fled to the United States in May after Chinese authorities increased their harassment of his AIDS advocacy group.
A torchlight parade through Oslo's dark, snowy streets ended at the Grand Hotel where the laureate normally spends the night. It was there that the Obamas waved to an enthralled crowd last year.
Jagland said awarding the prize to Liu was not "a prize against China," and he urged Beijing that as a world power it "should become used to being debated and criticized."
Outside Parliament, the Norwegian-Chinese Association held a pro-China rally with a handful of people proclaiming the committee had made a mistake in awarding the prize to Liu.
China's fury at Liu's award has reached proportions last seen during the Soviet and Nazi regimes. But even Cold War dissidents Andrei Sakharov of the Soviet Union and Lech Walesa of Poland were able to have their wives collect the prizes for them. Myanmar democracy activist Aung San Suu Kyi's award was accepted by her 18-year-old son in 1991.
The Kremlin forced writer Boris Pasternak of the Soviet Union to decline his 1958 literature prize. French writer Jean-Paul Sartre declined the 1964 literature prize because he had consistently declined all official honors.
In 1973, North Vietnamese negotiator Le Duc Tho was awarded the peace prize jointly with U.S. Secretary of State Henry Kissinger but said he could not accept it, citing continued fighting in Vietnam as his reason.
Laureates who are unable to attend the ceremony can have their relatives pick up the award and prize money, even at a later date.
Because literature laureate Doris Lessing was too ill to travel to Sweden on Dec. 10, 2007, to pick up her prize, a ceremony was held in London a month later.
If an award is not presented, as in the case of winners declining the prize, the money is returned to the Nobel Foundation.
In the Swedish capital of Stockholm, the other Nobel laureates were honored in a separate ceremony Friday. Winners in literature, physics, chemistry and economics received their awards from Sweden's King Carl XVI Gustaf.