(Reuters) - She beat "War Horse" author Michael Morpurgo, the former British Children's Laureate, America's "The Very Hungry Caterpillar" writer Eric Carle, and British fantasy writer Terry Pratchett among others to the annual prize.
The jury for the 5 million Swedish crown ($770,000) prize created by the Swedish government in 2002 said Isol, whose real name is Marisol Misenta, created picture books from the "eye-level of the child".
"Taking the child's clear view of the world as her starting point, she addresses their questions with forceful artistic expressions and offers open answers," the jury said.
"With liberating humor and levity she also deals with the darker aspects of existence."
Isol, who has written and illustrated 10 books of her own as well as other writers' books, was born in 1972 in Buenos Aires and also works as a singer and a composer.
Her first book, "A dog's life", was published in 1997 and her books have now been published in about 20 countries.
Her latest book, "La Bella Griselda", is the story of a princess whose suitors literally lose their heads as a result of their love of her.
Isol told Reuters that she was woken at 6.30 a.m. local time by the prize organizers with news of the award.
"I'm having to brush off my English, which was pretty rusty," she told Reuters. "It is all really unbelievable, especially as the other nominees are amazing."
Isol put her success down to being able to look at issues from a different perspective.
"It's about being able, sometimes, like children do, to fearlessly ask questions and answer back a bit."
Sweden's Astrid Lindgren, one of the world's most widely translated writers, is best known for her Pippi Longstocking books about the adventures of Pippi, her horse, monkey and friends Tommy and Annika. The prize was set up in the year of her death.
Last year's winner was Dutch writer Guus Kuijer, whose books often deal with modern social issues from the perspective of pre-teens.
Other winners include Philip Pullman, author of the fantasy trilogy "His Dark Materials" and Maurice Sendak, who wrote the children's classic "Where the Wild Things Are". ($1 = 6.5212 Swedish crowns)
(Reporting by Simon Johnson, additional reporting by Alejandro Lifschitz in Buenos Aires; Editing by Belinda Goldsmith)