The centre-right politician will play a key role at a time of crisis for the European Union, with the assembly having the final say on any deal for Britain's exit from the bloc.
After the maximum four rounds of voting that lasted all day, Tajani of the European People's Party got 351 votes while his socialist rival Gianni Pittella got 282.
“I congratulate you warmly. I wish you good luck as you carry out your mandate,” outgoing leader Martin Schulz of Germany said as he shook hands with Tajani.
European Council leader Donald Tusk hailed the importance of a position at the head of the EU's only elected body.
“I congratulate Antonio Tajani as next EP (European Parliament) President and look forward to cooperating. A united, strong EU needs a constructive, effective EP,” Tusk said.
Tajani, 63, is a former EU Commissioner who was criticised for his handling of the Volkswagen “Dieselgate” emissions row and who previously served as spokesman for scandal-plagued Berlusconi.
He was elected after the EPP and the main Liberal group in the parliament formed a “pro-European” alliance against rising populism.
Liberal leader Guy Verhofstadt, who is the parliament's Brexit negotiator, quit the race as a result.
“It is absolutely necessary. With Trump, with Putin, with many other challenges Europe faces, it is key we cooperate to reform our union,” said Verhofstadt.
Grand coalition breaks down
The role of EU parliament chief has grown hugely in prominence during socialist Schulz's five years in office.
But the new alliance comes after a decades-old “grand coalition” between the EPP and the socialists — under which they rotated the post of parliament chief between them — broke down.
The EPP said it was their turn after Schulz but Pittella had said he will not accept an EPP “monopoly” of the EU's top jobs — held by EPP members Jean-Claude Juncker, the European Commission president, and Tusk.
Tajani's win could therefore yet prompt calls for a reshuffle of the top jobs, adding unwelcome instability to an already crisis-hit union.
The new coalition agreement calls for a European defence force at a time when US President-elect Donald Trump has cast doubt on the future of the US-led NATO alliance.
It also calls for the European Parliament to have “full involvement” in the negotiations over Britain's exit from the EU after its shock referendum vote in June last year.
British Prime Minister Theresa May set out her plan for Brexit earlier onTuesday.
The grand coalition had been seen as limiting the influence of Eurosceptic groups led by Britain's UKIP and France's National Front, after they made stunning gains in the last European Parliament elections in May 2014.
The anti-EU movement has since gained strength, with Britain's Brexit vote and a similar wave of populism that took Donald Trump to the US presidency.
By Celine Le Prioux