The award marked a major upset at the world's top film festival in favour of the left-wing director, who turns 80 this year and is known for shining a light on the downtrodden.
He beat out runaway favourites including the rapturously received German comedy "Toni Erdmann" by Maren Ade, one of three women directors in competition, and US indie legend Jim Jarmusch's "Paterson" starring Adam Driver as a poetry-writing bus driver. Both left empty-handed.
"We must give a message of hope -- we must say another world is possible," Loach said as he accepted the prize.
The runner-up Grand Jury prize went to Canadian wunderkind director Xavier Dolan, 27, for his hot-tempered family drama "It's Only the End of the World" featuring a cast of A-list French stars which had been widely panned by critics.
Britain also claimed the third-place Jury prize, for Andrea Arnold's high-energy "American Honey" starring Shia LaBeouf in a tale of disadvantaged US youths selling magazines door-to-door.
Philippine star Jaclyn Jose won best actress for her mesmerising performance in Brillante Mendoza's "Ma' Rosa" as a mother selling drugs to survive who falls prey to corrupt police.
Iran's Shahab Hosseini clinched best actor for Asghar Farhadi's taut moral drama "The Salesman", about a married couple thrown into turmoil after the wife is attacked in their home. Farhadi also scooped the screenplay honours.
"Divines", a gripping drama about a young French teenage girl from a tough immigrant suburb who dreams of getting rich quick, got the nod for best first film, the Camera d'Or. Directed by Houda Benyamina, it starred her sister Oulaya Amamra.
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