The actual award ceremony will take place in October, when Dylan, 66, will be given his $66,400 prize by Crown Prince Felipe of Spain. The award is considered the Spanish equivalent of the Nobel prize.
The pre-eminent musician of his generation, Dylan has won Grammys, Golden Globes and Oscars. He is considered by many as a poet as well as a musician , having influenced a whole generation with his surrealist, and often controversial, lyrics.
His huge list of hit songs includes "Blowing in the Wind," "Like a Rolling Stone," and "Knocking on Heaven's Door" and "The Times They Are a-Changin." Some of his best-known hits date from his early career as a folk singer in the 1960s.
He has won seven Grammy awards, been decorated by the French government and received a prize from the Swedish academy of music.
His most recent album, "Modern Times", released last year, went straight to Number 1, making him the oldest person ever to top the U.S. album chart. He won his Oscar for the song "Things Have Changed," which was in the Michael Douglas movie "Wonder Boys."
The Minnesota-born singer and songwriter continues to tour and hosts a weekly hour-long radio program on XM Satellite Radio.
The prestigious Spanish awards are made in the fields of communication and humanities, scientific and technical research, social science, arts, letters, international cooperation, international understanding and sport.
Last week, former U.S. Vice President Al Gore, now a prominent environmentalist campaigner, won the international cooperation prize.
In the arts category previous winners have included Woody Allen in 2002, and Spanish film maker Pedro Almodovar last year.