The 16-year-old Pakistani activist was shot a year ago for campaigning for better rights for girls.
The Sakharov Prize for free speech is awarded by the European Parliament annually in memory of Soviet physicist and dissident Andrei Sakharov.
Edward Snowden had been a contender for the prize.
The 50,000 euro ($65,000) prize is considered Europe’s top human rights award.
Malala Yousafzai rose to prominence in 2009 when she wrote a blog for the BBC Urdu service about her life under Taliban rule and the lack of education for girls.
Malala Yousafzai received a standing ovation in July this year for an address to the UN General Assembly, in which she vowed she would never be silenced.
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