Judges said Pietro Masturzo's image was beautiful and captured the tension and emotion of the moment, as the protests were gathering strength.
The photo was shown by Italian RAI television and published in Loop magazine.
Agence France-Presse swept all three prizes in the Spot News Stories category, with Argentine photographer Walter Astrada taking the first place prize for the second year in a row, this time with photos of violence in Madagascar.
The Associated Press and France's Agence Vu took the most prizes overall, each with three wins and an honorable mention.
Masturzo said the prize committee informed him Thursday night. "I cannot believe it. I never thought a freelancer could win," he told AP by phone.
"The photo shows the beginning of something, the beginning of a huge story," jury chair Ayperi Karabuda Ecer said of Masturzo's photo. "It touches you both visually and emotionally and my heart went out to it immediately."
Jury member Guy Tillim said the shot managed to combine elements of conflict and everyday life
-- "the holy grail of photography."
It is "a very beautiful image of an Iranian landscape which would be worth looking at in itself. But it also arouses our curiosity about the woman shouting
-- incorporating this moment, the importance of this historical event," Tillim said.
Judges awarded prizes to 63 photographers from 23 countries in one of journalism's most prestigious photo contests. The jury spent two weeks reviewing a record 101,960 photographs by 5,847 photographers from 128 different nations.
Images of conflict zones were heavily represented, with New York Times photographer Adam Ferguson winning in the Spot News Singles category for a shot of a woman being rushed away from the scene of a suicide bombing in Kabul, Afghanistan.
Among the AP's three awards was a third place finish in the Spot News category for American photographer Julie Jacobson's shot, "fatally wounded Lance Cpl. Joshua Bernard is tended to by fellow US Marines," taken in Helmand province Afghanistan on Aug. 14.
The release of the photo over the objections of the soldier's family led to an emotional debate in the U.S. over whether its publication was important and good reporting or unethical and in poor taste.
The World Press jury also awarded a special mention for a frame grab of an amateur video posted on YouTube during the postelection uprising in Iran. It showed a woman identified as Neda Agha-Soltan lying on the ground after being shot in the chest.
The contest is only open to professional photographers but jury members said it was worthy of note because it "played an essential role in the news reporting of the year worldwide and could not have been made by a professional photographer."
Masturzo, whose photo also won first place in the People in the News Stories category with a series on the Iranian elections, called "From the rooftops of Tehran," will receive a prize of euro10,000 (US$14,600) and a camera at a ceremony in Amsterdam on May 2.
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