Czech international Nedved was rewarded with the Golden Ball after a series of outstanding performances for Juventus as they retained the Italian league title and reached the Champions League final in May.
The 31-year-old was named ahead of Arsenal striker Thierry Henry and AC Milan defender Paolo Maldini in a poll of European soccer journalists from 52 countries published by France Football magazine.
"I did not even dream of winning such an award. I'm very happy to receive such an important, such an extraordinary honour," Nedved said.
"I heard about the nominees and being among them. But I did not believe in my chances too much.
"A lot of players had good results like Paolo Maldini, (Real Madrid striker) Raul, (Zinedine) Zidane. All of them deserved to win," he added.
Nedved missed the Champions League final through suspension after being booked in the semi-final, when his spectacular performance was a major factor in the defeat of competition favourites Real Madrid.
Juventus, already Serie A winners for the second year running earlier in May, lost the Champions League final on penalties to AC Milan.
Nedved joined Juventus from Lazio in 2001, replacing French playmaker Zidane, named last week as FIFA's player of the year, who left the Italian club to join Real Madrid.
"I left Juve and he stepped in and worked wonders," said Zidane.
"I'm happy for him because he's a good guy or so I was told at Juventus. The result speaks for itself. The golden ball is rarely wrong," the Frenchman added.
Nedved helped Juve to the Serie A title in 2002 and again in 2003.
Nedved, who was also voted player of the year by the magazine World Soccer, is the second Czech to win the prestigious Golden Ball after Josef Masopust in 1962.
It is the eighth time a Juventus player has been crowned.
The Czech earned 190 points. France's Henry was second with 128 points and Maldini third on 123 points.
Milan's Ukrainian striker Andrei Shevchenko was fourth on 67 points with Zidane on 64 points.
"It was definitely my best year. I had lots of luck as well. Luck is part of a player's career," Nedved added.
