His rival, Rodrigo Avila of the conservative Arena party, conceded defeat after poll results showed Funes, 49, enjoyed a clear lead with over 51% of the vote to his 48%.
Funes' victory means that the Farabundo Marti National Liberation Front (FMLN) will take power for the first time since the end of a bloody civil war 18 years ago.
Funes thanked those voters who had chosen a "path of hope and change."
The party was formed by Marxist fighters who took part in the civil war against a series of U.S.-backed right wing governments. However, Funes, a former TV journalist, did not participate in the fighting, which left some 75,000 people dead.
The FMLN's victory ends two decades of Arena rule, during which the country became one of Washington's strongest allies in the region. Funes has said that he wants to maintain good ties with the U.S., and President Barack Obama has said his administration is ready to work with any elected leader. The Bush administration stated during 2004 polls that a FMLN victory would harm ties.