|Bin Laden was top of the US "most wanted" list|
The al-Qaeda leader was killed in a ground operation outside Islamabad based on US intelligence, the first lead for which emerged last August.
Mr Obama said after "a firefight", US forces took possession of his body.
Bin Laden was accused of being behind a number of atrocities, including the attacks on New York and Washington on 11 September 2001.
He was top of the US "most wanted" list.
Mr Obama said it was "the most significant achievement to date in our nation's effort to defeat al-Qaeda".
The US has put its embassies around the world on alert, warning Americans of the possibility of al-Qaeda reprisal attacks for Bin Laden's killing.
Crowds gathered outside the White House in Washington DC, chanting "USA, USA" after the news emerged.
Last night there were rumours an operation was going on in an area close to Abbottabad. There were unconfirmed reports of a military helicopter crashing in the area as well.
Witnesses said the whole area was cordoned off and nobody was allowed close although they did hear gunshots and firearms. But nobody had any inkling that this was an operation to get Osama Bin Laden.
For those who keep a close on eye on these matters it wasn't a total shock that he was ultimately hunted down in an urban area.
In the past we have had reports of him being treated in hospitals in Rawalpindi for kidney problems. There was even one report that he was treated in the southern city of Karachi. All of these were officially denied.
And some of the big al-Qaeda and Taliban names in the past have been captured in big Pakistani cities. Khalid Sheikh Mohammed, the Kuwaiti-born senior al-Qaeda leader, was captured in Rawalpindi and Afghan Taliban military commander Mullah Baradar was reportedly captured in Karachi.
Bin Laden approved the 9/11 attacks in which nearly 3,000 people died, saying later that the results had exceeded his expectations.
He evaded the forces of the US and its allies for almost a decade, despite a $25m bounty on his head.
His death will be seen as a major blow to al-Qaeda but also raises fears of reprisal attacks, correspondents say.
Mr Obama said he had been briefed last August on a possible lead to Bin Laden's whereabouts.
"It was far from certain, and it took many months to run this thread to ground," Mr Obama said.
"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 of Pakistan.
"And finally, last week, I determined that we had enough intelligence to take action, and authorised an operation to get Osama Bin Laden and bring him to justice," the president said.
On Sunday a small team of US forces undertook the operation in Abbottabad, north of Islamabad.
After a "firefight" Bin Laden was killed and his body taken by US forces, the president said.
He said "no Americans were harmed" in the operation.
Former US President Bill Clinton said in a statement: "This is a profoundly important moment not just for the families of those who lost their lives on 9/11 and in al-Qaeda's other attacks but for people all over the world who want to build a common future of peace, freedom, and cooperation for our children."
Mr Clinton's successor, President George W Bush, described the news as a "momentous achievement".
"The fight against terror goes on, but tonight America has sent an unmistakable message: No matter how long it takes, justice will be done," Mr Bush said in a statement.
BBC security correspondent Frank Gardner says that, to many in the West, Bin Laden became the embodiment of global terrorism, but to others he was a hero, a devout Muslim who fought two world superpowers in the name of jihad.
The son of a wealthy Saudi construction family, Bin Laden grew up in a privileged world. But soon after the Soviets invaded Afghanistan he joined the mujahideen there and fought alongside them with his Arab followers, a group that later formed the nucleus for al-Qaeda.
After declaring war on America in 1998, Bin Laden is widely believed to have been behind the bombings of US embassies in East Africa, a billion-dollar US warship, and the attacks on New York and Washington.