Ratzinger, 78, took the pontifical name Benedict XVI and is the 265th pope of the Roman Catholic Church.
Ratzinger was close to his predecessor, Pope John Paul II, and appears to share the latter's conservative views on the direction the church should take.
Cheers arose when white smoke began to billow from the special smokestack of the Sistine Chapel shortly before 6 p.m. local time at the Vatican.
But the smoke had tinges of gray. White smoke is to signify that a pope has been elected; black smoke means a ballot had chosen no pope. To avoid ambiguity, the Vatican had promised to sound the bells of St. Peter's Basilica to confirm that a pope had been elected. But at first the bells were silent.
In a signal of his likely conservatism if elected, Ratzinger spoke out in a sermon on 18 April against what he called the "dictatorship of relativism" and defended what the Roman Catholic Church has traditionally regarded as absolute truths.
Finally, roughly a quarter of an hour after the smoke first appeared, the bells rang, and tens of thousands of people packing St. Peter's Square and the nearby area began to cheer wildly.
Thirty-five minutes after the sounding of the bells, Cardinal Jose Arturo Medina Estevez of Chile emerged on the balcony of the papal apartment. He announced the new pope's identity to the faithful who had been waiting in the square all afternoon -- and the thousands who began streaming into the plaza once the news broke that a pope had been elected.
"I announce a great joy to you all," Medina Estevez said in Latin and in English. "We have a pope."
Again the crowd cheered.
Soon Benedict XVI stepped out onto the balcony overlooking the square and asked in Italian for their prayers.
"Dear brothers and sisters, after the great Pope John Paul II," the new pontiff said, "the cardinals have elected me a simple and humble worker in the vineyard of the Lord."
Pope John Paul II, a Pole, died on 2 April.
Benedict's election comes at a crucial time for the Roman Catholic Church. European enrollment is declining, as it is in the United States. Many Western church members have been pressing for change, including a greater role for women in the liturgy and an end to restrictive rules on contraception and divorce.
But Benedict is not generally expected to favor such changes. In fact, yesterday, he presided over a Mass just before the church's 115 cardinals went into seclusion to begin the election process.
In his sermon, Ratzinger spoke out against what he called the "dictatorship of relativism" and defended what the Roman Catholic Church has traditionally regarded as absolute truths. It appeared to be a clear message that if he were elected pope, he would steer the church away from the relaxation of doctrine that many progressive Western Catholics have been urging.
But while John Paul II was revered in his home country of Poland, Ratzinger has been divisive in his native Germany. Germans are said to blame his influence for Vatican edicts that run counter to Western social change and efforts to unite with Germany's chief Protestant religion, Lutheranism.
Some say the new pope might signal the end of a reform movement that began in the mid-20th century with the election of Pope John XXIII in 1958. John began a campaign of reform in the 2,000-year-old church, including allowing the Mass, the chief service of Catholicism, to be celebrated in local languages, rather than ancient Latin.
But after John died in 1963, Vatican efforts at liturgical reform have been less vigorous.
(compiled from television and wire reports)