The 68-year-old edged out 23 other contenders to take the 50,000 euro ($68,000) prize, one of eight given in different fields by the Asturias Foundation each year.
The prize jury praised Banville for his works, "each of (which) attracts and delights for his skill in developing the plot and his mastery of registers and expressive nuances, as well as for his reflections on the secrets of the human heart".
Banville won the Man Booker prize, widely regarded as the most significant literary prize in English, in 2005 for his novel "The Sea" about a retired art historian who tries to reconcile himself with the death of his wife at a seaside village.
Banville said "it was a great pleasure and a great honour" to win the award.
"I know what a wonderful prize it is, culturally and historically, and I am very proud indeed that my name should be added to the long list of great writers who have received it in the past," he said in a statement.
Previous winners of the literature prize include US writer Philip Roth, Canada's Margaret Atwood and Lebanese-born writer Amin Maalouf.
Banville said in an interview with Britain's The Guardian newspaper last month that the character of Quirke had come from the "damaged recesses of my Irish soul."
"I sympathise with Quirke; he is a very damaged person, as many Irish people are from their upbringing," he added.
The Spanish awards, named after the country's future king Crown Prince Felipe, are presented in the northern city of Oviedo in October in a glittering ceremony broadcast live on Spanish television.
In addition to the cash, winners receive a sculpture designed by the late Catalan artist Joan Miro.