The breakthrough could lead to an era of new therapies to reverse crippling diseases such as AIDS, blindness and cancer.
Through experiments with worms the pair has shown that a double strand of ribonucleic acid, the genetic messenger of the cell, can silence targeted genes in a process known as RNA interference.
By "silencing" over-active or malfunctioning genes, researchers hope to be able to devise a new generation of treatments for virus infections, cardiovascular disease, hormonal disorders and a range of inherited health problems.
"Their discovery clarified many confusing and contradictory experimental Observations (and) heralded the start of a new research field," the Nobel committee said.
In a statement, Mr Mello said "Our work was just one piece of a puzzle but I think it is opening a door to a whole new frontier from which we can learn so much more about our body's own protective mechanisms."
The pair published their discovery in the journal Nature in 1998, and in 2002 the US medical journal ‘Science’ named RNAi as the breakthrough of the year.
But the science is very new and analysts caution that technical problems and safety concerns need to be resolved before RNAi therapies enter the medical vocabulary.