Djokovic, who ended a second successive year on top of the ATP rankings, successfully defended his Australian Open title, reached the final at the French Open and U.S. Open and claimed five other titles including the season-ending Tour Finals.
Britain's Murray was a strong contender for the honour after beating Djokovic at the U.S. Open to win his first major title after four losses in finals and claiming Olympic gold at Wimbledon, just weeks after reaching the grand slam final there in which he lost to an inspired Roger Federer.
"I am proud to have been named ITF World Champion for the second successive year," Djokovic, who dominated 2011 with three of the four grand slam titles, said in a statement on Tuesday.
"It was very difficult to follow up such a successful season in 2011, but it was extremely satisfying to win another grand slam title, reach two other major finals and finish the year at number one."
The 31-year-old Williams was unstoppable in the second half of 2012, winning Wimbledon, singles and doubles gold at the Olympics and the U.S. Open.
"It means a lot to be named ITF World Champion for the third time. It has been such an amazing experience this year to win the Olympics and two Grand Slam tournaments, and I look forward to having an awesome 2013," said the 15-times major winner.
Americans Bob and Mike Bryan were named men's doubles World Champions for the ninth time in 10 years after winning Olympic gold for the first time, while Sara Errani and Roberta Vinci of Italy, winners of the French Open and U.S. Open, became women's doubles World Champions for the first time.
Dutchwoman Esther Vergeer was named women's wheelchair World Champion for the 13th successive year after winning a fourth Paralympic gold. France's Stephane Houdet won the men's award.