Mr Garcia had almost 55 percent of the vote and a lead of more than nine points over radical nationalist Ollanta Humala, according to a count of 84 percent of the ballots announced early on Monday.
"The people have voted for us," the social-democrat told cheering supporters outside his party headquarters.
Mr Garcia said the election sent a clear message to Venezuela's leftist leader, Hugo Chavez, who backed his rival.
Voters, he said, "defeated the efforts by Mr Hugo Chavez to incorporate us in his strategy of expansion of the militarist and retrograde model he wants to implant in South America."
Chavez had urged Peruvians to vote for Mr Humala, a fellow former army officer, and said he would break off ties with Peru if Garcia is elected.
Mr Garcia's victory speech was punctuated by chants of "Chavez listen, Alan has won."
The outcome was certain to be welcomed by the US administration, which feared the possible rise to power of another ally of President Chavez, just months after Bolivia's leftist President Evo Morales took office.
While he remains controversial, Mr Garcia has gained reluctant support from former political opponents worried by Mr Humala's anti-establishment program and his ties to President Chavez.
Mr Garcia has capitalised on the unease over the radical proposals of his rival, a political newcomer who advocates a redistribution of wealth and the nationalisation of the key mining sector.
A charismatic social-democrat, Mr Garcia has pledged to bring about "responsible" social reforms. Over the years, he has warmed to free market concepts, and insists he has learned from the mistakes of his administration, which was marked by hyperinflation, corruption and unchecked insurgencies.
Reviled after his 1985-1990 presidency, Mr Garcia, a suave politician and a gifted orator, made a surprising comeback in 2001, narrowly losing his first re-election bid to Alejandro Toledo, the current president.
A lawyer educated in Paris and Madrid, Mr Garcia is backed by the well-oiled machinery of the social-democratic APRA, Peru's oldest party.
But Mr Humala had presented a serious challenge, dominating the first round residential election in April, when his Union for Peru party won the most mandates in the 120-seat unicameral Congress but fell short of a majority.
"It is a night of victory," Mr Humala said on Sunday, adding that his national movement "managed in very little time to awaken the minds of Peruvians."
Mr Humala's rapid rise from political obscurity is largely attributed to support from millions of impoverished Peruvians, who often feel economic growth only benefited the corrupt and the rich.
His call to nationalise the mining sector stirred unease on financial markets, particularly since Bolivia recently increased state controls over its gas industry, and Ecuador canceled Occidental Petroleum's oil exploration rights.
Mr Humala first appeared in the spotlight in late 2000, when he and his brother Antauro led a brief military uprising against then-president Alberto Fujimori.
For many voters, picking between the two candidates was a question of choosing the lesser of two evils.
"How can you choose? One is awful, the other is improvised," said Bruno Vitalino, 46, after voting -- for Garcia -- in the well-heeled Lima neighbourhood of San Isidro.
Among the first to congratulate Mr Garcia was congressman Santiago Fujimori, a brother of ex-president Alberto Fujimori.
Alberto Fujimori, who fled to Japan in 2000, had hoped to run for a third term but was arrested in Chile as he tried to make his way home in November. He was released in May, and is awaiting a decision on a request for extradition to Peru where he is wanted on charges of corruption and human rights abuse.