Time called Putin a "steely and determined man" who has "emerged as a critical linchpin of the 21st century."
The magazine said Putin's last year in office has been his most successful. "At home, he secured his political future. Abroad, he expanded his outsize - if not always benign - influence on global affairs."
The Russian president is followed in Time's list by Nobel Peace Prize winner and former U.S. vice president Al Gore, Harry Potter creator J.K. Rowling, and Chinese leader Hu Jintao.
The last Russian to be chosen Person of the Year was Soviet leader Mikhail Gorbachev, in 1987. Two years later, Gorbachev was declared Man of the Decade. Two other Soviet leaders, Joseph Stalin (1939, 1942) and Nikita Khushchev (1957), were also Time Magazine's people of the year.
The magazine says it aims to pick "the person or persons who most affected the news and our lives, for good or for ill," and that the award is "not an endorsement."
Describing Putin, the magazine said he "stands, above all, for stability - stability before freedom, stability before choice, stability in a country that has hardly seen it for a hundred years."
Time said it expects the president to continue to lead Russia in his new role as prime minister next year.