Liz Truss will travel to Balmoral in Scotland on Tuesday to meet the Queen and officially become prime minister.
She beat rival Rishi Sunak by 81,326 votes to 60,399, getting 57% of the vote.
Truss has inherited a raft of problems from Boris Johnson, including inflation at its highest levels for decades, energy bills spiralling out of control, Brexit and the war in Ukraine.
Watch: Liz Truss to become PM after winning leadership vote
The foreign secretary beat her rival, former chancellor Rishi Sunak, by 81,326 votes to 60,399.
It was the the closest result since the member's vote was introduced, far less than the decisive victory which Truss had been tipped to receive by pollsters.
Speaking in Westminster after the announcement, Truss said it was an honour to become the next prime minister after a "hard fought campaign" against Sunak.
She promised a “bold plan” to cut taxes and grow the economy and “deliver on the energy crisis, dealing with people’s energy bills but also dealing with the long-term issues we have on energy supply”.
Dashing Labour hopes of a snap poll, Truss also stated the next general election would be in 2024.
Speaking after the result, Sunak tweeted: "It’s right we now unite behind the new PM, Liz Truss, as she steers the country through difficult times."
Meanwhile, outgoing PM Boris Johnson wrote: "Congratulations to @trussliz on her decisive win. I know she has the right plan to tackle the cost of living crisis, unite our party and continue the great work of uniting and levelling up our country. Now is the time for all Conservatives to get behind her 100 per cent.
While Truss has won the leadership contest, she has not yet become prime minister. She will travel to Balmoral in Scotland on Tuesday, where the Queen will formally ask her to become PM and form a government in her name.
But then the hard work begins. Truss has inherited a raft of problems from her predecessor.
These include inflation at its highest levels for decades, energy bills spiralling out of control, Brexit and the war in Ukraine.
But what has the 47-year-old promised to do over the last two months of campaigning to lead her party and the country?
Truss has pledged to "start cutting taxes from day one" with a new budget and spending review that would reverse April's rise in national insurance and next year's corporation tax hike from 19% to 25%.
But she has come under fire for not fully explaining exactly how she will fund the £30bn worth of tax cuts she has promised, only saying they "can be paid for within the existing fiscal envelope".
However, she has said she will immediately implement her tax policies on arriving in Downing Street.
On Sunday, while discussing the cost of living crisis, Truss said: "I am absolutely determined to sort out this issue within a month, present a full plan for how we are going to reduce taxes, how we’re going to get the British economy going, and how we are going to find our way out of these very difficult times."
Cost of living
Truss repeatedly declined at the weekend to spell out her plans to tackle soaring energy bills.
She promised to act "immediately" to take on the energy crisis upon entering Number 10 but would not offer clear detail of the support struggling households can expect.
Truss denied she was being "coy", saying she wanted to reassure voters that help is coming, but indicated they would need to wait for a few days yet to find out what exactly such support might look like.
She told the BBC’s Sunday with Laura Kuenssberg programme: "I will act immediately on bills and on energy supply because I think those two things go hand in hand.
“We need to deal with the immediate problem, we need to help people. We need to help businesses. But we also need to sort out the supply issues."
However, when asked about why she wouldn't provide more details, Truss said: "Before you have been elected as prime minister, you don’t have all the wherewithal to get the things done.
"This is why it will take a week to sort out the precise plans and make sure we are able to announce them. That is why I cannot go into details at this stage. It would be wrong."
On the campaign trail in July, Truss vowed to scrap all remaining European Union laws by the end of 2023.
EU rules "hinder" British businesses, Truss said, and she promised to set a sunset deadline or every piece of EU-derived regulation.
While she campaigned for remain in the 2016 referendum, she has embraced the UK's divorce from the EU and introduced the Northern Ireland Protocol bill, designed to scrap large parts of the Brexit deal governing that country.
But she will need to maintain a friendly working relationship with the UK's neighbours in the EU.
During leadership hustings last month, Truss was criticised for saying said the "jury is out" when asked if Emmanuel Macron is a "friend or foe" – leading Macron to reply that France remains friends with the UK "in spite of its leaders".
Truss looks set to follow in Johnson's footsteps when it comes to the war in Ukraine, last month promising Ukraine would "have no greater ally" than the UK if she was made prime minister.
She cited her record as foreign secretary since Russia's invasion of Ukraine six months ago.
"We are already at the vanguard of international support in providing £2.3bn in military aid, more than any other nation in Europe," she said.
"We rallied our G7 partners in targeting Russia with the toughest sanctions ever on a major economy."
Truss added that she would "go further as prime minister" by declassifying more intelligence to expose Russian misinformation while also repeating a promise to increase defence spending to 3% of GDP by 2030.