The election was held against the backdrop of the arrest of seven FIFA officials, including two vice presidents who are accused by US authorities of taking tens of millions of dollars in bribes.
The brother of Jordan's king forced the vote into a second round, after Blatter fell seven votes short of the two thirds majority to win in the first round.
Blatter, who has held the position of FIFA president since 1998, got 133 votes to Prince Ali's 73.
Following his win, the 79-year-old Blatter said that he will be the "commander" who "guides this boat FIFA" out of the corruption turmoil it has sunk into.
Blatter indicated he would not stand again saying he would hand over the organisation to his successo in four years.
The prince thanked those "brave enough" to vote for him before announcing he was pulling out. Blatter congratulated the prince on his performance.
The divisions in the world football body were reflected in the voting pattern. While most of Europe’s 53 votes along with the United States and Australia went in favour of Prince Hussein, Blatter got overwhelming support from the federations in Africa and Asia.
The cloud of arrests of top officials hung over the FIFA congress on Friday.
During his address prior to the election, Blatter questioned the timing of the arrests so close to the election, declaring: "People say it was a coincidence. But I have a small question mark."
Blatter repeated his case that he cannot "monitor" football affairs alone and cannot be blamed for the scandals.
He insisted that the guilty ones are individuals, not the whole organisation.
The arrests and the election also attracted considerable attention from world leaders.
While Russia's President Vladimir Putin condemned the US action in asking for the extradition of the seven officials, British Prime Minister David Cameron backed calls for Blatter to resign.
French President Francois Hollande said sports groups selecting the hosts of major events must be "irreproachable".
German Foreign Minister Frank-Walter Steinmeier said that if world football cannot clear up "poisonous" corruption, government agencies would be forced to step in.