Her campaign headquarters promptly proclaimed victory, saying Ms Bachelet will be "the president of all Chileans."
Ms Bachelet, who ran for the ruling centre-left coalition, totalled 53.51 percent of the ballots, while her opponent, Sebastian Pinera, a wealthy businessman, got 46.48 percent, according to tallies from 97.50 percent of polling stations.
Ms Bachelet had been widely expected to win the election, but her campaign
manager, Sergio Bitar, said her showing was even better than anticipated.
"This shows stronger support than we had expected," said Mr Bitar.
Mr Pinera conceded defeat and congratulated Ms Bachelet.
"I want to wish Michelle Bachelet much success," he told supporters at his campaign headquarters.
"We wanted to win this election ... we did not achieve it because a majority of people decided otherwise," he said.
The victory extends the rule of the centre-left coalition that has governed Chile since the end of the 1973-90 dictatorship of General Augusto Pinochet.
Opinion polls ahead of the run-off election showed socialist Michelle Bachelet, an agnostic, had a good chance of becoming the first woman to lead the socially conservative South American country.
Officials started tallying the ballots at 4pm (6am AEDT) after polling stations closed.
Ms Bachelet garnered 46 percent in the first round of voting last month, 21 points ahead of Mr Pinera.
Fortunate woman
"I feel like a very fortunate woman," Ms Bachelet told national television on Sunday.
"I was the first woman in Chile's history to be minister of health, and the first woman minister of defence, and if I am elected, I would be Chile's first woman president. That means so much to so many women."
Ms Bachelet, 54, voted at a Santiago school, accompanied by her youngest child.
She said she would await early returns at home and head to a hotel in the capital where "everything is ready for a big celebration."
Pinera upbeat
Despite trailing Ms Bachelet by six points in the polls, Mr Pinera was upbeat as he cast his ballot in downtown Santiago.
"After so many years of Concertacion, a change would be very good for our country," he said.
But he also reiterated claims President Ricardo Lagos interfered in the electoral process by openly backing Ms Bachelet.
On Sunday afternoon Mr Pinera piloted his helicopter over Santiago, saying this helped him relax as he awaited the outcome of the election.
He said his wife had pressed him to give up on his initial plan to paraglide off a Santiago cliff.
Mr Pinera, 56, who owns a majority stake in the LAN airline, a television station and several other businesses, has led an aggressive campaign on a socially moderate but fiscally conservative platform.
The conservative candidate, whose wealth is estimated at US$1.2 billion, had sought to convince voters his entrepreneurial successes demonstrate he has what it takes to lead Latin America's star economy.
Copper prices
Ms Bachelet, for her part, has said she would take advantage of record copper prices to improve education and conditions for the less fortunate.
She has portrayed herself as an ordinary woman who understands the concerns of ordinary people.
"I work, I take care of my home and I drop my daughter off at school. But I'm also a Chilean who feels a calling to fight for justice and to public service."
As a leftist agnostic raising three children from two different fathers,
Ms Bachelet seems an unlikely leader for a country with strongly conservative, Roman Catholic roots.
But her suffering during the Pinochet era has won sympathy from many people in a country still scarred by the 17-year dictatorship.
Ms Bachelet's father, an air force general, was an adviser to socialist president Salvador Allende, who was toppled by General Augusto Pinochet in 1973.
Tortured while in prison, Ms Bachelet's father died six months later.
Voting is generally compulsory in Chile, where more than eight million people were required to cast their ballots Sunday.
But General Pinochet, 90, who holds voter ID number one, was not allowed to vote because he is awaiting trial over the deaths of dissidents during his 17-year dictatorship.
He has been released on bond from the house arrest that was ordered as he awaits trial in one case, but on Wednesday the appeals court in Santiago also lifted the immunity he enjoyed as an ex-president, clearing the way for his trial in another case.