The 20-year-old Spaniard beat AC Milan's Stephan El Shaarawy and Atletico Madrid's Thibaut Courtois to the prestigious Golden Boy award.
Isco was selected by a panel of 30 journalists from 20 European nations and becomes the tenth player to receive the prize.
Past winners include Lionel Messi, Wayne Rooney and Sergio Aguero, while Borussia Dortmund's Mario Götze collected the accolade last year.
"I'm overjoyed," Isco told Tuttosport. "It is a wonderful thing. I see the past winners and it almost makes me shiver, names of the highest prestige, like Messi.
"When I read that I was one of three candidates for the title, I thought it was a joke. When I knew that El Shaarawy and Courtois were the other candidates, I didn't expect to win.
"This Golden Boy will be an incentive for me to become a real star of international football, like those who have gone before me."
Isco won with 137 votes, 12 ahead of El Shaarawy and 21 in front of Courtois, who is on loan at Atletico from Chelsea.
He has played a key role in Malaga's recent rise and has been in fine form this season, scoring six goals and assisting another eight in his 25 appearances.
Isco joined Malaga in July 2011 after starting his career with Valencia.