President-elect Barack Obama told ecstatic supporters on Tuesday that "change has come to America" and called on all Americans to unite and meet pressing challenges.
Mr Obama, the first black man to be elected, will be inaugurated the 44th US president on 20 January, along with vice president-elect Joe Biden.
The Democrats will inherit an economy mired in the worst financial crisis since the 1930s, two wars in Afghanistan and Iraq and a nuclear showdown with Iran.
Taking the stage in his home city of Chicago after defeating his Republican rival John McCain following a bitter two-year election campaign, Mr Obama, 47, told an enormous outdoor victory rally that the road ahead would be tough.
"Our climb will be steep," he the crowd of more than 200,000 supporters who crammed into the rally at Grant Park in his home city of Chicago.
"We may not get there in one year or even one term, but America - I have never been more hopeful than I am tonight that we will get there."
Mr Obama captured the key battleground states of Pennsylvania and Ohio, before breaking through the winning threshold of 270 electoral college votes on Tuesday, when projections showed he had also taken California and a slew of other states.
Then came the news that he had also seized Florida, Virginia and Colorado - all of which voted Republican in 2004 - turning swathes of the map from red to blue.
The win by Mr Obama, son of a black father from Kenya and white mother from Kansas, marked a milestone in American history. It came 45 years after the height of the civil rights movement led by Martin Luther King.
The Illinois senator took stock of what it meant to be elected the first black US president.
"It's the answer that led those who have been told for so long by so many to be cynical, and fearful, and doubtful of what we can achieve to put their hands on the arc of history and bend it once more toward the hope of a better day.
"It's been a long time coming, but tonight, because of what we did on this day, in this election, at this defining moment, change has come to America."
Tribute to McCain
Mr Obama paid tribute to his defeated rival as a patriot, hailing Mr McCain's status as a former prisoner of war in Vietnam and saying he hoped to work with him.
"He has endured sacrifices for America that most of us cannot begin to imagine, and we are better off for the service rendered by this brave and selfless leader."
Mr McCain publicly conceded defeat and congratulated Mr Obama on winning the presidency on Tuesday, saying: "the American people have spoken, and they have spoken clearly."
"I urge all Americans who supported me to join me in not just congratulating him, but offering our next president our goodwill and earnest effort to find ways to come together."
Mr McCain saw his hopes for victory evaporate with losses in a string of key battleground states led by Ohio, the state that narrowly clinched Mr Bush's re-election in 2004, and Virginia, a state that had not backed a Democrat since 1964.
The 72-year-old Arizona senator had hoped to become the oldest president to begin a first term in the White House and see running mate Sarah Palin become the first female US vice president.
President George W Bush telephoned Mr Obama to congratulate him on his "awesome night", according to White House spokeswoman Dana Perino.
Democrats hold power in Congress
Mr Obama led a Democratic electoral landslide that also expanded the party's majorities in both chambers of Congress and firmly repudiated eight years of the Republican Mr Bush's leadership.
In the Congressional elections which co-incided with the president poll, the Democrats retained their control of the House of Representatives.
All the seats in the House were contested, and the indications are that the Democrats will increase their majority of 36 seats and will also keep control of the US Senate.
Projected states won
Under America's Electoral College system, states are apportioned votes based on their population, the biggest being California with 55 votes.
A candidate needs to gain 270 out of the 538 Electoral College votes to win the presidency.
Mr Obama has at least 338 Electoral College votes and is projected to have seized Ohio, New Mexico, Iowa, Virginia, Florida, Colorado and Nevada - all Republican wins in 2004.
He is also projected to have won: Vermont, New Hampshire, Pennsylvania, Illinois, Delaware, Massachusetts, District of Columbia, Maryland, Connecticut, Maine, New Jersey, Michigan, Minnesota, Wisconsin, New York, Rhode Island, California, Hawaii, Washington, Oregon.
Mr McCain is projected to have won: Alaska, Kentucky, South Carolina, Oklahoma, Tennessee, Arkansas, Alabama, Kansas, North Dakota, Wyoming, Georgia, Louisiana, West Virginia, Texas, Mississippi, Utah, Arizona, Idaho, South Dakota.
Long lines greeted voters in many key states but no major breakdowns or irregularities were reported as an estimated 130 million Americans cast votes on a successor to the unpopular Mr Bush.