Spain's Alcaraz, 20, fought back from a nervy start to win 1-6 7-6 (8-6) 6-1 3-6 6-4 against the defending champion.
Djokovic was going for a fifth straight win, an eighth men's triumph and a 24th major - all record-equalling feats.
But the 36-year-old Serb was outlasted by top seed Alcaraz, who underlined his class by winning a second major title.
"It is a dream come true for me," Alcaraz, who was playing in only his fourth grass-court tournament, said.
"Even if I lost, I would have been proud of myself. To be able to play in these stages of these occasions - as a boy of 20 years old - is really fast.
"I'm really proud of myself."
Alcaraz, who won his first Grand Slam title at the US Open last year, celebrated by falling flat on his face after taking his first match point and kicking a ball into the crowd.
The majority of a packed Centre Court, which included the Prince and Princess of Wales, actor Brad Pitt and two-time winner Andy Murray, rose to their feet to acclaim the All England Club's newest champion.
As tradition now dictates, Alcaraz ran up the stairs from the court to his box and embraced coach Juan Carlos Ferrero, along with his family and friends.
Alcaraz is the third youngest man to win the Wimbledon title in the Open era after 17-year-old Boris Becker in 1985 and 20-year-old Bjorn Borg in 1976.
"You never like to lose matches like this but I guess when all the emotions are settled I have to still be very grateful," said 23-time Grand Slam champion Djokovic, who broke down in tears during his on-court speech.
"I won many tough matches here. Maybe I have won a couple of finals I should have lost so maybe this is even-steven.
"It is a tough one to swallow when you are so close. I lost to a better player, I have to congratulate him, and move on - stronger hopefully."
-- Courtesy of BBC Sport