Yunus, 66, set up a new kind of bank in 1976 to lend to the neediest, particularly women, in Bangladesh, enabling them to start up small businesses without collateral.
In doing so, he pioneered microcredit, a system copied in more than 100 nations from the United States to Uganda. UN Secretary-General Kofi Annan, presidents and prime ministers hailed the award, the first Nobel Peace Prize to a Bangladeshi.
"Eradication of poverty can give you real peace," Yunus told reporters at his home in the Bangladeshi capital, Dhaka, after he won from a field of 191 candidates. "Now the war against poverty will be further intensified across the world. It will consolidate the struggle against poverty through microcredit in most of the countries," he said. "There should be no poverty, anywhere."
In awarding a prize more traditionally given to those who sign treaties to end wars or fight for human rights, the secretive five-member Norwegian Nobel Committee said eliminating poverty was a path to peace and democracy.
"Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means. Development from below also serves to advance democracy and human rights," the committee added.
The academic and his bank were surprise winners of the 10 million Swedish crown ($1.36 million) award to be presented on December 10 in Oslo. He said he would use the money to fund a project to produce low-cost, nutritious food for the poor and for an eye hospital, a drinking water project and a health care scheme.
"It will give a significant amount of energy to the whole movement, I can guarantee you that ... this is just the beginning of it."
Although he has won dozens of other awards, including the Seoul Peace Prize which he is due to receive next week, Yunus said the Nobel accolade was special. "No matter how many other prizes you get, this is the real one."
SHOCKED BY FAMINE Returning from a Fulbright scholarship in the United States, Yunus was shaken by the 1974 Bangladesh famine and headed out into the villages to see what he could do.
He found the region's women in severe debt to extortionate moneylenders. His initial goal was simply to persuade a local bank manager to give villagers regular credit, but the banker said that was impossible without a guarantee.
Yunus set out to prove him wrong and never looked back. Grameen- the word means "village" or "rural" in the Bangla language-has lent $5.72 billion since it began. Of this, $5.07 billion has been repaid.
The bank, which has turned a profit in all but three years, lends to 6.6 million people, 96 percent of them women, and has not received donor funds in eight years. It counts beggars among its members, giving them interest-free loans and life insurance.
Members are not required to give up begging, but encouraged to work. Today the bank is 94 percent owned by the rural poor it serves and 6 percent by the state. Yunus is managing director.
Nobel Committee Chairman Ole Danbolt Mjoes told Reuters: "This idea was generated in a mostly Muslim country and then fantastically spread to the whole world in a positive way." Bangladeshi Prime Minister Begum Khaleda Zia said the award would "play a great role to uplift the image of the country".
Annan, himself a Nobel peace laureate, hailed Yunus and Grameen Bank as "long-standing allies of the United Nations in the cause of development and the empowerment of women".
WIDENING NOTION OF PEACE First awarded in 1901, the peace prize has evolved to include the defence of human rights and the environment.
The 2004 award went to Kenyan environmentalist Wangari Maathai for a campaign to plant trees in Africa. Last year's choice of the International Atomic Energy Agency and its Egyptian head Mohamed ElBaradei was more in line with dynamite millionaire Alfred Nobel's original intent of disarmament. Not all observers have appreciated the apparent shift.
"This should be a prize for peace, or for encouragement to stay the course-as it was in my case, when it put more wind in my sails," 1983 Nobel peace laureate Lech Walesa told Polish television. "Perhaps the name of the prize should be changed to those who work to eliminate (economic) differences?"