The traditional ceremony took place under baking sun and tight security in front of the ruins of the Temple of Hera in Greece, birthplace of the Ancient Games.
London 2012 chairman Lord Coe was joined by IOC president Jacques Rogge and other Olympics officials as performers completed the elaborate torch-lighting routine prior to the Olympic Flame's journey around Greece.
The performance in ancient Olympia was the pre-cursor to the torch's journey around the Greek mainland and islands, after which it will be handed to the UK for a 70-day relay around Britain.
Dressed in robes, actress Ino Menegaki played the key role of the high priestess who lights the flame from the rays of the sun.
She lifted a blazing torch from a parabolic mirror so it is lit as if beamed by the sun's rays from the Greek god of the sun to guarantee the purity of the flame, according to tradition. This is the only way the Olympic flame can be lit, again as stated by ancient rituals.
With the ceremonial occasion under way, the Olympic Anthem was played and the Olympic Flag was hoisted. God Save The Queen was also played as the Union Flag was raised.
An extract of the poem The Light Of Olympia was recited.
Spyros Zannias, chairman of the Olympic Torch Relay Commission, International Olympic Committee president Jacques Rogge, Hellenic Olympic Committee president Spyros Capralos, and London 2012 chairman Lord Coe said a few words before the lighting began.
A 15-strong delegation from London 2012, led by Lord Coe, was invited to witness the lighting first-hand at the Temple of Hera, as the remaining guests stayed seated in the ancient stadium.
London 2012's chairman Sir Keith Mills and chief executive Paul Deighton moved forward.
British IOC member Sir Craig Reedie, Olympics minister Hugh Robertson plus Dr David Landsman, the British ambassador to the Hellenic Republic were also part of the group.
Representatives from London 2012 sponsors Lloyds TSB, Coca Cola and Samsung and a single journalist made up the rest of the delegation of British VIPs.
During the ceremony, Lord Coe presented a framed London 2012 poster - titled For The Unknown Runner by artist Chris Ofili - to the Hellenic Olympic Committee.
