Prize for literature with his humorous and disturbing short-story collection "Tenth of December."
The chair of the judging panel, poet Lavinia Greenlaw, said Monday that Saunders' "darkly playful" stories explore "the human self under ordinary and extraordinary pressure."
Saunders beat seven other finalists, including Kent Haruf, Rachel Kushner, Anne Carson and Eimear McBride.
Saunders has won acclaim for his satirically edged short stories, and last week won the Story Prize for short fiction.
His tales place characters with recognizable human emotions in quietly unsettling situations. In one story in "Tenth of December," a man is used as a guinea pig in unusual drug trials, while another features women trafficked to be human lawn ornaments.
He's probably best known outside literary circles for a commencement speech to Syracuse University's class of 2013, whose key message was: "Try to be kinder." It went viral on the Internet and will soon be published as a book.
Saunders picked up that theme at the prize ceremony Monday, saying the goal of fiction' "is to develop our ability to be more sympathetic to others."
"To me, fiction since the first time I started doing it was about softening the borders between myself and other people," he said. "I think in a time like ours, where so much of the public discourse tells us that we are antagonistic, that we're separate, fiction is a wonderful way to remind ourselves that actually that's a lie."
The Folio Prize is in its first year and hopes to rival the Booker Prize as the English-speaking world's most prestigious literary award. It is open to any book published in Britain in the previous year, which has led some in the U.K. literary world to fear it will become U.S.-dominated.
Five of the eight finalists for this year's prize were American.