The magazine also shortlisted Pakistani girls' education rights activist Malala Yousafzai, 15, for the title.
"For finding and forging a new majority, for turning weakness into opportunity and for seeking, amid great adversity, to create a more perfect union, Barack Obama is TIME's 2012 Person of the Year," the publication's editors said in explaining their choice for the annual honour.
This is the second time that Obama will feature on Time's cover as Person of the Year.
He was given the title in 2008 and becomes only the 13th person in the publication's 85-year old history of naming 'person of the year' to be chosen more than once as the year's most influential newsmaker.
Among others shortlisted was Malala, Egyptian President Mohamed Mursi and Apple CEO Tim Cook.
Yousafzai, recuperating in Britain after being shot in the head by Taliban militants who opposed her fearless efforts to fight for the education rights of Pakistani girls, has "become perhaps the world's most admired children's-rights advocate".
"In trying, and failing, to kill Malala, the Taliban appear to have made a crucial mistake. They wanted to silence her. Instead, they amplified her voice. Since October her message has been heard around the world, from cramped classrooms where girls scratch out lessons in the dirt to the halls of the UN and national governments and NGOs, where legions of activists argue ever more vehemently that the key to raising living standards throughout the developing world is the empowerment of women and girls," Time said.
Fabiola Gianotti, a head scientist at CERN was also shortlisted for the annual recognition by Time that called the Higgs Boson experiment as one of "science's greatest achievements".
Time said Obama has a slew of "overwhelming challenges" waiting for him as he enters his second term at the White House.
Deadlocked fiscal-cliff talks, years of high unemployment and political and economic unrest in places Syria, Egypt and Europe will test Obama's second-term presidency.
However, as America undergoes significant cultural and demographic changes, as was evident by the voting turnout in the November Presidential elections, Time said "Obama is the 21st century version of this new American".
"We are in the midst of historic cultural and demographic changes, and Barack Obama is both the symbol and in some ways the architect of this new America... He's more than just a political figure; he's a cultural one," who became the first President to embrace gay marriage and to offer work permits to many young undocumented immigrants.
"If his win in 2008 was extraordinary, then 2012 is confirmation that demographic change is here to stay," Time said.
Time added that after four of the most challenging years in the nation's history, Obama's "chance to leave office as a great President who was able to face crises and build a new majority coalition remains within reach."
Obama is the first Democratic President since Franklin Roosevelt to win more than 50 per cent of vote in consecutive elections and the first President since 1940 to win re-election with an unemployment rate of over 7.5 per cent.
When he takes the presidential oath on January 20, Obama would be the first Democrat in more than 75 years to get a majority of the popular vote twice.
After the 2012 presidential election, Obama started working on a "40,000-foot" list of "immediate goals" he would like to tackle in his second term. These include immigration reform, fiscal deficit, climate change, early childhood education, college costs, electoral reform.
"The Obama effect was not ephemeral anymore, no longer reducible to what had once been mocked as 'that hopey-changey stuff'... history would not record Obama's presidency as a fluke," it added.
Obama, who was interviewed by the publication for the cover story, said of his re-election, "it was easy to think that maybe 2008 was the anomaly. And I think 2012 was an indication that, no, this is not an anomaly. We've gone through a very difficult time. The American people have rightly been frustrated at the pace of change, and the economy is still struggling, and this President we elected is imperfect. And yet despite all that, this is who we want to be. That's a good thing".
In Obama, the nation also saw a President who did not shy away from becoming emotional and wiping away tears on more than one occasion.
Obama was also critical of himself when in the wake of the Newtown school killings, he said the country and its President has not done enough to deal with mass shootings.
Citing Obama's historic re-election win, Time said the election was "a choice, not a referendum."
"You do understand that as President of the United States, the amount of power you have is overstated in some ways. But what you do have the capacity to do is to set a direction," Time quoted Obama as saying.