The Glasgow-based quartet were the favorites among the 12-strong shortlist to take home the award for their self-titled album.
The $35,600 prize, now in its 13th year, honors the best album of the year by a British or Irish band. It is judged on talent and innovation rather than commercial sales, and the winner can usually expect a surge in sales and publicity.
Among the acts Franz Ferdinand beat for the prize, announced Tuesday, were two-time nominee The Streets, aka rapper Mike Skinner; young soul sensation Joss Stone; urban star Jamelia; and guitarless rock band Keane.
The shortlist was rounded out by new rockers The Zutons, jazz singer Amy Winehouse, Northern Irish quartet Snow Patrol, dance outfit Basement Jaxx, pop group Belle & Sebastian, rapper Ty and singer Robert Wyatt.
The panel of judges, made up of music experts and journalists, debated the contest right up until moments before the winner was announced.
The gong was handed over by last year's winner, garage star Dizzee Rascal, otherwise known as Dylan Mills.
Franz Ferdinand, named after the heir to the Austro-Hungarian empire whose assassination started World War I, have only released one album with a mere 11 tracks. But they sell out all their shows and reviewers have lavished praise on their powerful guitar riffs, making them the standard-bearers for Britain's "art rock" movement.
The shortlist for the Mercury Prize is whittled down by judges from an original choice of 180 albums.
In recent years, critics have criticized the award for being willfully obscure and selecting "token" classical or folk acts, but this year, no music from that genre was nominated.