Santos won 2-1 on aggregate after the first leg had ended scoreless in Montevideo.
Neymar put Santos ahead in the 47th minute and Danilo made it 2-0 in the 69th before an own goal in the 80th brought Penarol back into the contest.
A brawl started after the match as Santos celebrated, with Penarol players going after the Brazilians and both sides exchanging punches and kicks until police came in to intervene.
“A (Santos) fan entered the field and provoked us,” Penarol forward Alejandro Martinuccio said. “They have to learn how to celebrate, we had accepted the loss.”
A couple of Santos players were hit and stayed on the ground after the fight, but none were seriously injured. Penarol players later calmed down and came back to receive their runner-up medals.
“They were a worthy opponent, but they don't know how to lose,” Santos defender Leo said.
Santos took its third title in Latin America's biggest club competition, having won back to back titles in 1962 and 1963 when a young Pele led the attack.
Now the star was Neymar, touted as a future star of Brazil's national team.
“It's the happiest day of my life, I made history,” Neymar said. “We deserved this title, it's time to celebrate.”
Neymar kneeled down a few moments after the final whistle and sobbed with his hands covering his face. Pele also cried on the field after the match was over.
“We have to thank these young guys for giving us this title,” Pele said.
Penarol fell short in its bid to win its first Copa Libertadores title in 24 years, which would have brought it level with Argentina's Boca Juniors on six championships. Independiente of Argentina holds the most, with seven.
The victory makes Santos the most successful Brazilian team in the Copa Libertadores, tied with Sao Paulo with three titles.
With Pele watching from the stands, Neymar opened the scoring with a firm low shot into the near corner, using the side of his right foot to get the ball past Penarol goalkeeper Sebastian Sosa. Paulo Henrique Ganso, back from injury after more than a month sidelined, started the play with a nifty back-heel pass to Arouca, who then found Neymar on the left side of the penalty box.
“Allowing the goal early in the second half was what killed us,” Penarol forward Alejandro Martinuccio said.
It was the sixth Copa Libertadores goal for Neymar, the 19-year-old Brazil striker with a Mohawk hairdo who was likely to leave the club soon, as many of Europe's biggest clubs are preparing giant transfer offers.
Right back Danilo added to the lead after a pass from Elano in a breakaway, dribbling past a defender and firing a low shot across the area into Sosa's corner.
Penarol pulled one closer when Santos defender Durval found his own net after a cross by Fabian Estoyanoff, who had just entered the match. But Santos managed to defend its lead without allowing many dangerous chances to Penarol.
“It's an important title for the club and for all the players,” Santos captain Edu Dracena said. “We've been trying to win this third title for a long time and now we've made history.”
This Santos team was able to go one better than its 2003 predecessor, which lost the final to Boca Juniors despite boasting the likes of striker Robinho and playmaker Diego.
It is the first Libertadores title for Santos coach Muricy Ramalho, who had lost in the final in 2006 with Sao Paulo and in 2008 with Fluminense. Ramalho's teams have won four of the past five Brazilian league titles, but he had been better known for his near failures in the South American competition.
Santos became the team to beat after the emergence of teenagers Neymar and Ganso, who are touted as future stars of the national team when it hosts the 2014 World Cup.
While Neymar was key for Santos throughout the Copa Libertadores, Ganso only returned to the team in Wednesday's final after more than a month sideline because of a right thigh muscle injury.
Santos' first title in 1962 also came in a final against Penarol, with Pele scoring twice. Penarol won the first two Copa Libertadores in 1960 and 61' and then added titles in ‘66, ‘82 and ‘87.
But after that last title, Penarol didn't play a significant role in continental football until the team's impressive campaign this year, when it eliminated strong teams like Velez Sarsfield of Argentina, Universidad Catolica of Chile and defending Copa Libertadores champion Internacional of Brazil.
Playing at a Pacaembu Stadium packed with nearly 40,000 supporters, Santos tried to pressure from the start, but Penarol was able to control the Brazilians' attacking thrusts.
Still, Santos had some of the two best chances in the first half. A free kick by Elano was barely saved by Penarol goalkeeper Sebastian Sosa in the 32nd, and then defender Leo's close-range shot went just wide in the 44th. It also came close with headers by Durval in the fourth and 45th minutes.
Penarol had a couple of opportunities, with Argentine midfielder Alejandro Martinuccio failing to control a ball inside the area in the 12th for what could have been an easy goal, then firing narrowly wide with a left-footed shot from outside the box in the 27th.
Penarol lost defender Alejandro Gonzalez to injury in the 38th after a hard foul by Neymar.
Santos: Rafael, Danilo, Edu Dracena, Durval, Leo (Alex Sandro, 68), Arouca, Adriano, Elano, Paulo Henrique Ganso (Para, 86), Neymar, Ze Eduardo.
Penarol: Sebastian Sosa, Alejandro Gonzalez (Emiliano Albin, 38) (Fabian Estoyanoff, 79), Carlos Valdez, Guillermo Rodriguez, Dario Rodriguez, Matias Corujo, Nicolas Freitas, Luis Aguiar, Matias Mier (Urretaviscaya da Luz, 64), Alejandro Martinuccio, Juan Manuel Olivera.
Referee: Sergio Pezzotta (Argentina). AP