An international jury that included prominent German literary critic Marcel Reich-Ranicki selected Oz for the prize, which is awarded annually with a $10,000 prize.
Past winners have included the American novelist Philip Roth and Nobel laureates Elfriede Jelinek of Austria and Harold Pinter of Britain.
It is awarded by the Prague-based Franz Kafka Society to authors whose works "appeal to readers regardless of their origin, nationality and culture."
The society said in a statement Monday that Oz has agreed to travel to Prague with his wife for an October ceremony to receive the prize.
Oz has been said to be among the candidates for the Nobel Prize for literature in last several years.