The president called the killing of bin Laden the "most significant achievement to date" in the effort to defeat al Qaeda.
"Justice has been done," Obama said.
Bin Laden was located at a compound in Abbottabad, Pakistan, which was monitored and when the time was determined to be right, the president said, he authorized a "targeted operation."
"A small team of Americans carried out the operation," Obama said. "After a firefight, they killed Osama bin Laden and took custody of his body."
DNA testing confirmed that it was bin Laden, sources told ABC News.
Obama said tonight that he was briefed last August on a possible but "far from certain" lead to bin Laden, but it took many months for the intelligence community to "run this thread to ground."
"I met repeatedly with my National Security team as we developed more information about the possibility that we had located Bin Laden hiding within a compound deep inside Pakistan," the president said.
"Finally, last week I determined that we had enough intelligence to take action and authorized an operation to get Osama Bin Laden and bring him to justice," he said.
Sources said the attack was carried out by Joint Special Operations Command forces working with the CIA.
Vice President Biden briefed Republican congressional leaders this evening on the operation, which had been kept secret until shortly before the president's announcement tonight.
Former President George W. Bush said in a statement tonight that Obama called him to inform him of the news of bin Laden's death.
Bush called the operation a "momentous achievement" that "marks a victory for America, for people who seek peace around the world, and for all those who lost loved ones on September 11, 2001.
"I congratulated him and the men and women of our military and intelligence communities who devoted their lives to this mission. They have our everlasting gratitude," the former president said in a statement. "The fight against terror goes on, but tonight America has sent an unmistakable message: No matter how long it takes, justice will be done."
Outside the White House, a crowd of about 200 people has gathered with American flags. They are singing the Star Spangled banner and chanting "USA USA"
This major development in the war on terror comes just days after Obama announced significant changes to his national security team.
Last week the president announced that CIA Director Leon Panetta will replace Secretary of Defense Robert Gates when he retires this summer. Gen. David Petraeus, the nation's most high-profile soldier, will become the head of the CIA.
In addition to overseeing the wars in Iraq and Afghanistan Petraeus, a four-star general, is the head of the U.S. Central Command, where his portfolio includes some of the world's most critical hotspots, including Yemen and Pakistan.
Bin Laden's death brings to an end a tumultuous life that saw him go from being the carefree son of a Saudi billionaire, to terrorist leader and the most wanted man in the world.
Bin Laden created and funded the al Qaeda terror network, which was responsible for the Sept. 11, 2001, attacks on the United States. The Saudi exile had been a man on the run since the U.S.-led invasion of Afghanistan overthrew the ruling Taliban regime, which harbored bin Laden.
In a video filmed two months after the Sept. 11 attacks, bin Laden gloated about the attack, saying it had exceeded even his "optimistic" calculations.
"Our terrorism is against America. Our terrorism is a blessed terrorism to prevent the unjust person from committing injustice and to stop American support for Israel, which kills our sons," he said in the video.
Long before the Sept. 11 attacks, bin Laden was known as an enemy of the United States. He was suspected of playing large roles in the 1998 bombings of two U.S. Embassies in Africa and the attack on the USS Cole in the Yemeni port of Aden in October 2000.
In addition, authorities say bin Laden and his al Qaeda network were involved in previous attacks against U.S. interests -- including the 1993 World Trade Center bombing, failed plots to kill President Clinton and the pope, and attacks on U.S. troops in Saudi Arabia and Somalia.
Bin Laden also used his millions to bankroll terrorist training camps in Sudan, the Philippines and Afghanistan, sending "holy warriors" to foment revolution and fight with fundamentalist Muslim forces across North Africa, in Chechnya, Tajikistan and Bosnia.
Until the capture of one of his top al Qaeda lieutenants in March 2003, there had been no confirmation of his whereabouts -- or even that he was still alive -- since late 2001, when he appeared in a series of videotapes later released to news organizations.
In recent years, several audio recordings of bin Laden have been authenticated by U.S. officials and made public. In an 18-minute videotape weeks before the 2004 U.S. presidential election, bin Laden threatened fresh attacks on the United States as well as his intent to push America into bankruptcy.