Beatification is the last stage before sainthood.
In his mass homily, Benedict fondly recalled his predecessor, the 'beloved' Karol Wojtyla, who died on April 2, 2005.
'I wanted his cause of beatification to move forward with reasonable haste,' Benedict said.
He was referring to his decision, taken shortly after his own election as pope, to waive the normal five-year waiting period after a candidate's death.
'And now the longed-for day has come: it came quickly because this is what was pleasing to the Lord: John Paul II is blessed!' Benedict said.
His words drew cheers from the faithful gathered before him in the square, many waving the red-and-white flags of John Paul's native Poland.
Behind Benedict, hanging from the central loggia of St Peter's Basilica was huge portrait of a smiling John Paul, who led the Catholic Church for over 26 years - the second-longest pontificate recorded in history.
John Paul's beatification is the fastest in modern times, edging out by 15 days the 2003 beatification of Mother Teresa, the ethnic- Albanian, Macedonian-born nun who won worldwide admiration for her work in the slums of Calcutta and who died in 1997.
During Sunday's beatification ceremony, a French nun, Sister Marie Simon-Pierre, brought to the altar an ampule containing some blood which the Vatican said was taken from John Paul just days before his death.
Simon-Pierre had been diagnosed with Parkinson's disease in 2001 but was cured in June 2005, allegedly thanks to the intercession of John Paul who was himself afflicted by Parkinson's.
Simon-Pierre's healing was recognized earlier this year by the Vatican as a miracle attributable to John Paul, thus fulfilling, in terms of Church law, one of the requirements for beatification.
The Vatican would have to recognise another miracle before John Paul can be proclaimed a saint.
Benedict in his homily, reflected upon some of the highlights of John Paul's life one in which he said, many had 'perceived the fragrance of his sanctity'.
'John Paul II is blessed because of his faith, a strong, generous and apostolic faith,' Benedict said.
At one stage during the homily, Benedict referred to John Paul's widely attributed role in the downfall of communist rule in Europe, beginning with the support he gave to Polish pro-democracy trade union Solidarity.
'He (John Paul) rightly reclaimed for Christianity that impulse of hope which had in some sense faltered before Marxism and the ideology of progress,' Benedict said.
With dozens of international leaders attending the beatification mass, metal detectors at entrances leading to the square were activated amid tight security measures.
Among those present were Polish President Bronislaw Komorowski, his Italian counterpart Giorgio Napolitano, Prime Minister Silvio Berlusconi, Belgium's King Albert II, Mexican President Felipe Calderon and French Prime Minister Francois Fillon.
Also attending was Zimbabwe's controversial president, Robert Mugabe, who is subject of a travel ban by the European Union because of his human rights violations. The Vatican, however, is a sovereign state and is not a EU member.
Mugabe, who is a Catholic, also attended the John Paul's funeral in 2005.
After Sunday's mass, the faithful were to be allowed to file past a casket containing John Paul's remains, on display inside St Peter's Basilica.
Ceremonies marking the beatification also took place in many other parts of the world, including in Israel, the Philippines and in Wojtyla's birthplace, the Polish town of Wadowice. The late pope also served as archbishop in Krakow for many years.
