The 63-year-old writer, long a favored contender, was tapped for the prestigious award for his ability to write stories that "in innumerable guises portrays the surprising involvement of the outsider."
The academy said Coetzee's novels are characterized by their well-crafted composition, pregnant dialogue and analytical brilliance, reports CBS News' George Wood.
Horace Engdahl, the permanent secretary of the academy said the decision was an easy one.
"We were very much convinced of the lasting value of his contribution to literature. I'm not speaking of the number of books, but the variety, and the very high average quality," he said. "I think he is a writer ... that will continue to be discussed and analyzed and we think he should belong to our literary heritage."
The prize includes a check for more than 10 million kronor ($1.3 million), but it can also bestow the added advantage of increased sales, celebrity and admiration.
It was the second time since 1991 the academy gave the award to a South African, when it went to author Nadine Gordimer.
The academy had been Eurocentric in its recent decisions, giving the award to Europeans the last eight years. Since 1980, only four winners have come from Africa, three from South America, two from the United States and one from Asia. It's been 14 years since someone from the Middle East was given the nod, Egyptian Naguib Mahfouz.
Coetzee is renowned for shunning publicity, and never bothered to collect the two Booker Prizes he won in 1983 and 1999.
Coetzee, who holds a Ph.D in computer-generated language, is one of South Africa's most successful authors, penning eight novels and numerous essays and manifestos covering everything from rugby to censorship.
Currently in Chicago on sabbatical from the University of Cape Town, Coetzee spent time working as a computer programmer in the United Kingdom before studying linguistics in Texas.
Some of Coetzee's works include "Dusklands" and "Disgrace," which won the 1999 Booker Prize.
"There is a great wealth of variety in Coetzee's works," the academy said in its citation. "No two books ever follow the same recipe. Extensive reading reveals a recurring pattern, the downward spiraling journeys he considers necessary for the salvation of his characters."
The 18 lifetime members of the 217-year-old Swedish Academy make the annual selection in deep secrecy at one of their weekly meetings and do not even reveal the date of the announcement until two days beforehand.
Nominees are not revealed publicly for 50 years, leaving the literary world to only guess about who was in the running. However, many of the same critically acclaimed authors are believed to be on the short list every year.
Last year's award went to Hungarian writer Imre Kertesz, whose fiction drew on his experience as a teenager in the Auschwitz concentration camp.
The literature prize is the first of this year's Nobel awards, reports Wood. The prizes in medicine, physics, chemistry, and economics will be announced next week.
The Nobel Peace Prize winner will be named Oct. 10 in Oslo, Norway, the only Nobel not awarded in Sweden.
Alfred Nobel, the Swedish industrialist and inventor of dynamite, specified in his will endowing the awards that nationality should not be a consideration, but many believe the Swedish Academy tries to spread the honor over different geographical areas.
Nobel otherwise gave only vague guidance about the prize, saying that it should go to those who "shall have conferred the greatest benefit on mankind" and "who shall have produced in the field of literature the most outstanding work in an ideal direction."
The prizes always are presented Dec. 10, the anniversary of Nobel's death in 1896.