The Norwegian Nobel Committee awarded the prize on Friday saying that peaceful global development can only come about if children and the young are respected.
Malala is the youngest person to be awarded the globally prestigious annual prize.
"The Norwegian Nobel Committee has decided that the Nobel Peace Prize for 2014 is to be awarded to Kailash Satyarthi and Malala Yousafzai for their struggle against the suppression of children and young people and for the right of all children to education," the jury said.
Malala - who survived being shot in the head by the Taliban in 2012 - was recognised for fighting for years for the right of girls to education, showing by example that children can contribute to improving their own situations.
Illustrations of Nobel Peace Prize recipients Pakistan's Malala Yousafzay and India's Kailash Satyarthi.
"She is (the) pride of Pakistan. She has made her countrymen proud."
"This she has done under the most dangerous circumstances," the committee said.
"Through her heroic struggle she has become a leading spokesperson for girls' rights to education."
It also said that the prize recognised the work by Satyarthi to head various forms of protests and demonstrations, all peaceful, focusing on the grave exploitation of children for financial gain.
"Children must go to school and not be financially exploited," the committee said.
Nobel Peace Prize recipients Pakistan's Malala Yousafzay and India's Kailash Satyarthi.
"In conflict-ridden areas in particular, the violation of children leads to the continuation of violence from generation to generation."
Malala at school when told of Nobel Peace Prize award
Teenager Malala Yousafzai was at school in the city of Birmingham in central England when she was told she had won the Nobel Peace Prize on Friday, a spokeswoman said.
"Malala is at school as normal today," she said, adding that the 17-year-old would hold a press conference later on Friday.
Malala attends Edgbaston High School, a private school in an upmarket part of Birmingham.
After being shot by the Taliban in October 2012, Malala was treated at a hospital in Birmingham.
She started at her school in the city in March last year.
Pakistan's Prime Minister Nawaz Sharif has congratulated teenage education campaigner Malala Yousafzai on winning the Nobel Peace Prize, calling her the "pride" of his country.
"She is (the) pride of Pakistan. She has made her countrymen proud. Her achievement is unparallelled and unequalled. Girls and boys of the world should take the lead from her struggle and commitment," he said in a statement.
Nobel Prize 'recognition of our fight': Satyarthi
Indian activist Kailash Satyarthi said Friday he was "delighted" to have won the Nobel Peace Prize, calling it "recognition of our fight for child rights".
Kailash, 60, also thanked the Nobel committee for "recognising the plight of millions of children who are suffering in this modern age", according to the Press Trust of India news agency.
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