The awards organization cited the 17-year-old Pakistani girl for "her courageous and dangerous fight for girls' right to education."
Malala, who became the world's youngest Nobel laureate earlier this month when she was awarded the peace prize, said she was honored to win this prize, known also as the "Children's Nobel."
"This award is not just for this one girl called Malala, this award is especially for children who are out of school," she said in an interview with Swedish broadcaster SVT. "I'm really happy and honored that this time this award was from children; children voted for me."
Malala said the annual prize, worth $50,000 in money that is traditionally donated to children's causes, is a sign that children strongly support the right to education.
"It shows that now children are standing up for their rights, they say that education for every child," she said.
Malala began speaking out for the rights of girls at age 11 in her country, and was shot in the head by a Taliban gunman two years ago. She was flown to Britain for treatment but said she doesn't remember the shooting.
Messages, TV greetings, and postcards from children worldwide helped and encouraged her as she recovered.
"It gave me hope. It lessened the pain that I had. I just thought before this incident I was maybe one girl, now we are millions," she said.
The 2014 World's Children's honorary awards, each worth $25,000, went to former US Microsoft executive John Wood for promoting children's reading programs and to Nepalese social worker Indira Ranamagar for helping prisoners' children.
The World's Children's Prize for the Rights of the Child is given for work toward "a more humane world in support of the rights of the child."
Malala plans to give her Children's Prize award money to the United Nations Relief and Works Agency, according to the Jerusalem Post:
"Innocent Palestinian children have suffered terribly and for too long," Yousafzai was quoted as saying while accepting the prize in Sweden. "We must all work to ensure Palestinian boys and girls, and all children everywhere, receive a quality education in a safe environment. Because without education, there will never be peace."