The flame was kindled by a “high priestess” who captured the morning sun’s rays in a parabolic mirror.
The ceremony came amid political and economic turmoil in Greece, the home of the Ancient Olympics, where a week-long leg of the relay will be held.
The flame flies to Britain on 18 May for a 70-day relay around the UK.
The lighting ceremony took place in front of the ruins of the Temple of Hera, next to the ancient stadium.
Actresses playing Olympic priestesses danced and men dressed as heralds put on a display symbolizing athletic strength.
“High priestess” Ino Menegaki then lit the flame in the bowl-shaped mirror and used it to light a Greek Olympic torch.
The flame – an Olympic symbol meant to represent purity because it comes from the sun – was then placed in an urn and taken to the stadium where the ancient Olympic Games were staged.
LOCOG Chairman Lord Sebastian Coe, International Olympic Committee president Jacques Rogge and Hellenic Olympic Committee president Spyros Capralos were in Olympia for the moment marking the countdown to London 2012.
Lord Sebastian Coe said: “Today is the rallying call to the athletes – the best athletes of their generation – to come to London. That in itself is a big moment because it’s the biggest sporting event in the calendar.”
He told assembled Greek and Olympic dignitaries and a crowd gathered on the slopes of the stadium: “We are reminded this morning of sport’s enduring and universal appeal, and the timeless Olympic values that transcend history and geography; values which, I believe, in these challenging times are more relevant than at any time before and particularly to young people the world over.
“In 1948, shortly after the Second World War, my predecessor stood where I am today and made the first tentative steps in turning the world from war to sport.
“We find ourselves in challenging times again and turn to sport once more to connect the world in a global celebration of achievement and inspiration.”
In the stadium, it lit the London 2012 torch of Liverpool-born Greek world champion 10 km swimmer Spyros Gianniotis, who will carry it on the first leg of the relay around Greece.
He passed it on to Alex Loukos, 19, the first British torchbearer, a boxer and, in 2005, one of a delegation of east London schoolchildren who travelled to Singapore as part of London’s final bid for the Games.
Alex Loukos said: “It feels like I’m coming full circle.
“I went out to Singapore before we even knew that we’d won the Games and now I’m here, sort of kicking it off. It’s a big honor and a privilege and I’m just trying to take it all in.”
The torch is due to travel 2,900 kms (1,800 miles) through the country, carried by 500 torchbearers, on a route circling the country and travelling out to Crete.
Greece has seen huge demonstrations of social unrest in previous months, sparked by financial chaos and efforts to reach a deal with the European Union on a bail-out for the Greek economy.
Talks to try to form a new government have been ongoing after elections on Sunday failed to produce a conclusive result.
Several international companies including BMW have stepped in to help fund the torch’s journey.
The Greek section of the 2012 torch relay ends at the Panathenaic Stadium, Athens, on Thursday 17 May, where the flame is handed over to London Olympic Games organizers.
The stadium hosted the first modern Olympic Games in 1896.
The last torchbearers in Greece will be Greek weightlifter Pyrros Dimas and Chinese gymnast Li Ning – who lit the cauldron at the Beijing 2008 opening ceremony.
The 2008 Olympic torch relay, which travelled the globe, was dogged by pro-Tibet, democracy and anti-China protests.
The 2012 flame will travel straight from Greece to the UK on 18 May, flying into the Royal Navy airbase at Culdrose, near Helston in Cornwall.
The UK torch relay begins at Land’s End the following morning when three times Olympic gold medal-winning sailor Ben Ainslie will be the first to carry the torch on British soil.
He wrote in the Daily Telegraph: “It is a privilege for me to be asked but, more than anything, it is an exciting moment for the country.
“The arrival of the torch on home soil really brings home how close the Games are.”
Carried by 8,000 torchbearers, the Barber Osgerby-designed torch will cover 8,000 miles across all of the country’s nations and regions.
It is due to reach the Olympic Stadium in Stratford on 27 July to light the cauldron at the opening ceremony of the Olympic Games.
For the ancient Greeks, fire was a divine element believed to have been stolen from the Gods.
A flame was first lit at the modern Olympics at the Amsterdam 1928 summer games, but it was not until Berlin 1936 that a torch relay route was set out from Greece to Germany.
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