He shaved two hundredths of a second off the previous record with a time of 1 minute and 41.09.
The previous record holder was Denmark's Kenyan-born Wilson Kipketer in 1997.
Rudisha, the African record holder and a world junior champion in the same distance in 2006, was led through the first 400m by pacesetter and fellow Kenyan Sammy Tangui.
He then managed to maintain his pace through to the finish line, breaking Kipketer's long-standing record.
He was pleased with the race and promises that he can go faster.
"Now that I have run that time, I can say I have the ability to improve and go faster" he said.
"I am very happy, it feels great to have the world record... when I saw the clock at the end, it was amazing, a fantastic feeling.
After having a disappointing season last year where he only reached the 800m semi-finals at the World Athletics Championships, Rudisha said he came to the German capital with something to prove and wanted to make up for last year's disappointment.
"Last year, I had a bad time in Berlin," he said.
"I am very happy to be the fastest 800 metres runner in the world...running is like a profession to me, so this means everything."
Rudisha has been in great form all season while competing in Europe, consistently working towards the record breaking time.
In Oslo's Diamond League meeting in June, he broke Sebastian Coe's 31-year-old meeting record with a run of 1:42.04.
Then at a meet in the Belgian city of Heusden-Zolder in July, Rudisha timed 1:41.51, an African record and the fastest time in the world since Kipketer set the previous best 13 years ago.
When reading about the athletes you can almost imagine the weariness that they must experience after their races.
Sometimes as Christians we also experience physical and emotional weariness.
Jesus, in the book of Matthew calls to all those who are weary, encouraging them to seek him and the rest that he offers.
"Come to me, all you who are weary and burdened, and I will give you rest. Take my yoke upon you and learn from me, for I am gentle and humble in heart, and you will find rest for your souls. For my yoke is easy and my burden is light"
Matthew 11:28-30