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London beat the favourite Paris by 54 votes to 50 at the IOC meeting in Singapore, after bids from Moscow, New York and Madrid were eliminated.
Prime Minister Tony Blair called the win "a momentous day" for Britain.
Paris had been the front runner throughout the campaign, but London's hopes were raised after an impressive presentation by Lord Coe, the bid chairman.
IOC president Jacques Rogge made the dramatic announcement at 1249 BST.
It will be the first time the Olympics has been held in Britain since 1948.
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