In a speech, the Pakistani schoolgirl and campaigner, who was shot in the head by the Taliban, dedicated the award to “the unsung heroes of Pakistan” and to human rights campaigners worldwide.
European Parliament President Martin Schulz presented the award.
Malala Yousafzai, 16, was shot a year ago after campaigning for better rights for girls in Pakistan.
The Sakharov Prize for free speech is awarded by the European Parliament annually in memory of Soviet physicist and dissident Andrei Sakharov.
The 50,000 euro ($65,000) prize is considered Europe’s top human rights award.
“I am hopeful the European Parliament will look beyond Europe to the suffering countries where people are still deprived of their basic rights, their freedom of thought is suppressed, freedom of speech is enchained,” Malala Yousafzai said.
“Many children have no food to eat, no water to drink and children are starving for education. It is alarming that 57 million children are deprived of education… this must shake our conscience.”
Malala Yousafzai began her speech with a famous quote often attributed to the 18th Century French philosopher Voltaire: “I do not agree with what you have to say, but I will defend to the death your right to say it.”
She said children in countries such as Pakistan “do not want an iPhone, a PlayStation or chocolates, they just want a book and a pen”.
MEPs gave her a standing ovation.
More than 20 former laureates attended the ceremony, a parliament spokesman said. Malala Yousafzai is the 25th laureate.
Martin Schulz called her “a global icon” and told her “you have given hope to millions of children”.
“It is our responsibility to ensure that your dream becomes a reality,” he said, referring to her ambition to spread free education to boys and girls everywhere.
Martin Schulz also praised her father for “not locking her away, and giving her freedom”.
Mala Yousafzai joins a distinguished list of winners of the Sakharov Prize that includes Nelson Mandela and Aung San Suu Kyi.
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