The 31-year-old winger becomes the first Welsh player to pick up the prestigious award.
He fended off the challenge of Ospreys and Wales colleague Ryan Jones along with Scotland scrum half Mike Blair, New Zealand fly-half and 2005 IRB Player of the Year Dan Carter and Italy captain Sergio Parisse.
"It's been a hell of a year and this has just capped it off really," said a delighted Williams. "It's the biggest honour you can get as an individual in rugby and it's totally overwhelming."
Williams is just the second winger to pick up the accolade, following on from last year's victor, South Africa's Bryan Habana.
"Just to get the prize from Bryan was gret as he is someone I hold in high regard. To follow Bryan was great and to be mentioned in the same breath as Dan Carter, Richie McCaw is just remarkable. It is an honour to be recognised by your peers and I'm delighted to have received this award," he said.
Williams raced over for six tries during Wales's grand slam campaign and continued his remarkable form at international level by touching down in each of the summer Tests against South Africa. He became his country's record try-scorer when he claimed his touch down against France in March and currently possesses 60 caps and 43 tries at the highest level.
"The IRB Player of the Year Award is the ultimate accolade for a player and takes into account performances in all the major internationals played during the year including the RBS Six Nations, Tri Nations and the June-July Tests," said International Rugby Board Chairman, Bernard Lapasset.
IRB Player of the Year Award winners
2008: Shane Williams (Wales)
2007: Bryan Habana (South Africa)
2006: Richie McCaw (New Zealand)
2005: Daniel Carter (New Zealand)
2004; Schalk Burger (South Africa)
2003: Jonny Wilkinson (England)
2002: Fabien Galthié (France)
2001: Keith Wood (Ireland)