Panahi, who has faced imprisonment and a 15-year travel ban for his outspoken criticism of the Islamic Republic, received a standing ovation as Cate Blanchett presented the award.
In his acceptance speech, he urged unity among Iranians striving for democracy: "Let's set aside our differences. The important thing now is the freedom of our country, so that no one would dare to tell us what to wear or what film to make."
France's foreign minister Jean-Noël Barrot said in a French post on his X account, "In an act of resistance against the Iranian regime's oppression, Jafar Panahi wins a Palme d'Or, reigniting hope for freedom fighters around the world."
The thriller, co-produced by Iran, France, and Luxembourg, was made clandestinely without official permission from Iranian authorities and features women not wearing the hijab, challenging Iran's compulsory dress code laws.
Panahi who managed to leave Iran and attend his film's premiere at Cannes after a 15-year travel ban, said on Wednesday he would be returning immediately to Iran after attending the Cannes Film Festival to begin work on his next film despite being free to travel again.