The 32-year-old Scot had not been favoured by the bookies but romped home well ahead of Formula One champion Lewis Hamilton and Olympic swimmer Rebecca Adlington.
Hoy said afterwards: "I must admit I was looking at the betting odds over the last few weeks and I was lagging back in third. Becky and Lewis were the clear favourites.
"I was hoping for a bronze medal but when I heard Becky's and Lewis' names read out I realised it could be me.
"There have been so many things that have happened since Beijing that you can't take it all in.
"This has to be the biggest thing I have achieved outside of sport. Any athlete will tell you that this is the one to win in terms of awards. This is the big one.
"Clearly the vote for me was a vote for the whole cycling team. There were four cyclists nominated in the top 10 and they were doing all they could to see a cyclist win."
Hoy polled 283,630 votes, compared to 163,864 for Hamilton and 145,924 for Adlington, 19, who won two golds in Beijing, the first British woman to do so since 1960.
He is the first Scot to take the award since runner Liz McColgan in 1991, while the only other cyclist was Tommy Simpson in 1965. McColgan had even been campaigning for the public to vote for Hoy.
The cyclist added: "It is a huge honour for our sport, and to be a Scottish winner.
"I remember Liz McColgan winning the 1/810,000m3/8 world championships in Tokyo in '91 and seeing her win the award. She has been saying some nice things about me in the press and I thank her for that support."
Hamilton, 23, also finished as runner-up a year ago but insisted after the British team's success in Beijing he never believed he would win.
He said: "In an Olympic year, I always thought an Olympian would win. I was up against such amazing athletes and I was very proud to be standing up there with them tonight."
Adlington, wearing a pair of Jimmy Choo shoes presented to her by the mayor of her home town Mansfield, said: "I never expected to win or even come second or third. I'm so happy for Chris - it's brilliant to see him win it."
Paralympic swimmer Eleanor Simmonds was named the BBC young sports personality of the year.
The 14-year-old swimmer, who won two golds at the Beijing Paralympics, beat Wimbledon junior champion Laura Robson and diver Tom Daley to the award for under-16s.
Jamaican sprinter Usain Bolt was named overseas sports personality of the year after winning the 100m, 200m and 4x100m golds in Beijing.
Team of the year was the British Olympic cycling team, who won 14 medals - eight of them golds - in Beijing. Cycling's performance director Dave Brailsford won the coach of the year award.
Sir Bobby Charlton was presented with the lifetime achievement award by his brother Jack, while the Helen Rollason award for outstanding achievement in the face of adversity went to Alastair Hignell, the former England rugby player-turned-broadcaster who has continued to work despite being diagnosed with multiple sclerosis in 1999.
The unsung hero award went to Ben Geyser, a 70-year-old boxing coach from Dorset.
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umpire 2, Salford M7 4HT (15/12/2008 at 14:39)
A true gentleman who thanks everyone for his medals but Chris, if you didn't want to do it yourself then you wouldn't of done it.
Many congratulations to the most friendliest cyclist at the Manchester velodrome, good luck for the future.
Secondly, a great big thanks you to Dave Brailsford and his coaching team at the Manchester Velodrome, without your guidance and support, GB Cyclist would not have done so well this year, keep up the good work.
Now, let us all party at the next revolutions to celebrate the SPOY awards.