Lee has blossomed since being given the opportunity to shoulder a heavier workload following the retirement of Glenn McGrath and Shane Warne early last year, winning the prestigious award that recognises the best Australian player for the previous year despite missing some play due to an ankle injury.
Lee polled 125 votes to win by 18 over veteran opener Matthew Hayden. Captain Ricky Ponting was third with 64.
Andrew Symonds was fourth at 54, followed by Michael Clarke, who got 52.
During the period of voting, Lee picked up 70 Test and one-day wickets, including claiming 40 wickets at 21.06 in the recent Tests against Sri Lanka and India.
Lee also won the Test player of the year, beating out Hayden, while the burly opener won the one-day player of the year on the back of his dominance at last year's World Cup triumph.
Hayden polled 24 votes in the one-dayers, to top Ponting, who collected 19.
Although Lee finished 11th in one-day voting, largely because he missed the World Cup due to his ankle injury, the Test voting carries more weight.
Lee idolised paceman Dennis Lillee and South African Alan Donald growing up and said it was a lifelong dream to be recognised as one of the best fast bowlers in the world.
"When I was nine years old, my Mum and Dad asked me what I wanted to be and I wanted to be the fastest bowler in the world," he said. "Everything that I did from the age of nine was always trying to get into the Australian team."
Hayden paid tribute to retiring one-day opening partner Adam Gilchrist in accepting his award.
"It's been a pretty amazing partnership with Adam, he's been inspirational to all of us," Hayden said.
"More to the point, we've just had an amazing side -- Ricky has had a fantastic year again, he's copped a hard time recently," he added. "It's been a very special year for all Australian cricketers."
In other awards announced, Queensland all-rounder Ashley Noffke was named the top state player.
Western Australia's Luke Pomersbach won the Bradman Young Cricketer of the Year award, while Lisa Sthalekar was named the women's top international cricketer for the second year in a row.