The moving drama by Claudia Llosa, 32, was the first Peruvian competition entry in the 59-year history of the Berlinale.
"This is for Peru, this is for our country," Llosa said, holding the trophy aloft, flanked by her lead actress Magaly Solier.
A Spanish-Peruvian production, "La Teta Asustada" tells the story of Fausta, who imbibes "the milk of sorrow" as an infant after her mother's brutal rape during the 1980 to 2000 war between the Peruvian army and Shining Path guerrillas.
Fausta is haunted by fear and regret after her mother's death but begins a journey of self-discovery that leads to a hopeful ending.
"I have to thank my mother to no end, all the women, and all of you – I dedicate this prize to my mother and all of Peru," Solier said, before singing a song from the movie in her native Quechua language.
A truth and reconciliation commission established in 2001 in Peru recorded nearly 70,000 murders and countless rapes and abductions during the government's battle with the Maoist rebels.
Tilda Swinton, the Oscar-winning Scottish actress who headed the Berlinale jury this year, said the jury's decision had been unanimous. "The Milk of Sorrow" beat out favourites including "The Messenger" starring Woody Harrelson and Ben Foster as GIs tasked with notifying loved ones of soldiers who have fallen in battle in Iraq. The film picked up a screenwriting prize for its Israeli-born director Oren Moverman and Alessandro Camon.
The Silver Bear prize for best actor went to Sotigui Kouyate of Mali for his role in "London River" as a father searching for his son in the wake of the July 2005 public transport bombings in the British capital.
"I would first of all like to thank Rachid Bouchareb and Jean Brehat for giving me the opportunity to be here tonight," he said, in a nod to the picture's Franco-Algerian director and French producer.
The 72-year-old also thanked the festival, saying that "every organisation like the Berlinale that allows people to meet and encounter each other's cultures does a good deed for the world today."
Austria's Birgit Minichmayr captured the prize for best actress as a woman in a doomed relationship in the German drama "Everyone Else", which also shared a runner-up prize for best picture with "Gigante" by Argentina's Adrian Biniez.
Iran's Asghar Farhadi won the Silver Bear for best director for his drama "About Elly" about a woman who vanishes on a beach getaway with friends. In an incisive look at relations between the sexes in the Islamic republic, the disappearance leaves a group of chic urbanites weaving an intricate web of lies to maintain the appearance of traditional social mores.
Eighteen films were in competition for the Golden and Silver Bear prizes in what critics said was a lacklustre year at the festival.
Swedish arthouse hero Lukas Moodysson received boos for his flat, incoherent "Mammoth" starring Gael Garcia Bernal and Michelle Williams, and critics savaged British director Sally Potter's "Rage," a send-up of the fashion industry featuring Jude Law in drag as a supermodel called Minx.
France's Bertrand Tavernier strongly divided audiences with his murder mystery set in post-Katrina New Orleans and starring Tommy Lee Jones, "In The Electric Mist". And reviewers dismissed "Happy Tears," a family drama with Demi Moore and Parker Posey as simply "weird."
Festival director Dieter Kosslick, who has just extended his contract until 2013, defended his choices against the howling critics. "One of the duties of a film festival is to follow a director on his or her career," Kosslick told the Hollywood Reporterthis week. "They don't only make masterpieces."
The 11-day festival, which ranks second only to Cannes in size and prestige, wraps up on Sunday. A Brazilian drama about police brutality, "Elite Squad," won the Golden
Bear in 2008.