In a statement the Nobel jury cited the “art of remembrance with which he evoked lives which were so difficult to understand, and revealed the reality of life during the Occupation.”
"This is someone who has written many books …. that are about memory, identity and aspiration," said Peter Englund, the permanent secretary of Sweden’s Nobel academy.
One of France's most celebrated writers, Modiano was praised by the Nobel committee as a modern-day Marcel Proust.
Modiano was born at the end of World War II, on July 30, 1945, in the Paris suburb of Boulogne into a family whose complex background set the scene for a lifelong obsession with that dark period in history.
His father Alberto Modiano was an Italian Jew with ties to the Gestapo, and to organised crime gangs, who was spared from wearing the yellow star.
His mother was a Flemish actress named Louisa Colpeyn. The pair met in Paris in 1942.
Published when he was just 22, in 1967, his first novel "La place de l'etoile", was a direct reference to the star Jews were forced to wear during World War II.
Modiano's recreations of wartime Paris are stuffed with meticulous detail - street names, cafes, metro stations and real-life events at that time, and he is sometimes talked of as a literary archaeologist.
His latest novel, Pour que tu ne te perdes pas dans le quartier (So you don't get lost in the neighbourhood) appeared in French this month.
While translated into more than 30 languages, the author has trouble expressing himself in public and refused a nomination to the elite Academie Francaise, with a critic once describing him as "1 metre 90 of timidity and candor".
Apart from his books, in the early 1970s, Modiano co-wrote the screenplay for Lacombe Lucien, a movie directed by Louis Malle focusing on French collaboration with the Nazis.
Modiano will receive the prize sum of eight million Swedish kronor (878,000 euros).
He will be presented with his award at a formal ceremony in Stockholm on December 10, the anniversary of prize founder Alfred Nobel's death in 1896.
Last year's Nobel Literature Prize went to the Canadian short-story writer Alice Munro.