Chinese state media blacked out the news and Chinese government censors blocked Nobel Prize reports, which highlighted Liu's calls for peaceful political change, from Internet websites. China declared the decision would harm its relations with Norway - and the Nordic country responded that it was a petty thing for a world power to do.
This year's peace prize followed a long tradition of honoring dissidents around the world and was the first Nobel for China's dissident community since it resurfaced after the Communists launched economic but not political reforms three decades ago.
Liu, 54, was sentenced last year to 11 years in prison for subversion. The Nobel committee said he was the first to be honored while still in prison, although other Nobel winners have been under house arrest, or imprisoned before the prize.
Other dissidents to win the peace prize include German pacifist Carl von Ossietzky in 1935, Soviet dissident Andrei Sakharov in 1975, Polish Solidarity leader Lech Walesa in 1983 and Myanmar democracy leader Aung San Suu Kyi in 1991.
The Nobel committee praised Liu's pacifist approach, ignoring threats by Chinese diplomats even before the announcement that such a decision would result in strained ties with Norway. Liu has been an ardent advocate of peaceful, gradual political change.
The Nobel committee cited Liu's participation in the Tiananmen Square protests in Beijing in 1989 and the Charter 08 document he recently co-authored, which called for greater freedom in China and an end to the Communist Party's political dominance.
Obama said in a statement that Liu "has sacrificed his freedom for his beliefs" and is "an eloquent and courageous spokesman for the advance of universal values through peaceful and nonviolent means."
"We call on the Chinese government to release Mr. Liu as soon as possible," Obama said.
Chinese authorities would not allow access to Liu on Friday, and it was not clear if he had been told about the award.
His wife, however, expressed joy at the news. Surrounded by police at their Beijing apartment, Liu Xia was not allowed out to meet reporters.
But she issued a statement through Freedom Now, a Washington-based rights group, saying she was grateful to the Nobel committee.
"It is a true honor for him and one for which I know he would say he is not worthy," she said, thanking former Czech Republic President Vaclav Havel and two former Nobel Peace Prize winners - Tibetan spiritual leader the Dalai Lama and South African Archbishop Desmond M. Tutu - for nominating her husband.
"I hope that the international community will take this opportunity to call on the Chinese government to press for my husband's release," she said.
Liu Xia planned to go Saturday to deliver the news to Liu at his prison, 300 miles (500 kilometers) from Beijing.
China's Foreign Ministry quickly criticized the Nobel decision, saying the award should been used instead to promote international friendship and disarmament.
"Liu Xiaobo is a criminal who has been sentenced by Chinese judicial departments for violating Chinese law," spokesman Ma Zhaoxu said in a statement. Honoring him "runs completely counter to the principle of the prize and also desecrates the peace prize."
The ministry said the decision would damage relations between China and Norway.
Ma's statement was later read on the state television channel intended for broadcast overseas.
In China, broadcasts of the announcement by CNN were blacked out. Popular Internet sites removed coverage of the Nobel prizes, placed prominently in recent days for the science awards. Messages about "Xiaobo" to Sina Microblog, a Twitter-like service run by Internet portal Sina.com, were quickly deleted. Attempts to send mobile text messages with the Chinese characters for Liu Xiaobo failed.
The Nobel committee said China, as a growing economic and political power, needed to take more responsibility for protecting the rights of its citizens.
"China has become a big power in economic terms as well as political terms, and it is normal that big powers should be under criticism," prize committee chairman Thorbjoern Jagland said, calling Liu Xiaobo (LEE-o SHAo-boh) a symbol for the fight for human rights in China.