Russian opposition activists condemned the sentence as a blatant move to punish Navalny, 37, for opposing the Kremlin just as he was preparing to stand in Moscow's mayoral election.
The United States said it was "deeply disappointed" and EU states swiftly condemned the verdict, in a new diplomatic controversy that threatens to further strain ties between Moscow and the West.
Judge Sergei Blinov said he found Navalny guilty of defrauding the local government in the northern Kirov region of 16 million rubles (USD 500,000) in a timber deal while acting as an unpaid advisor to the local authorities in 2009.
Handed down on Nelson Mandela's 95th birthday, the sentence is the most politically-explosive judgement in Russia since anti-Kremlin tycoon Mikhail Khodorkovsky was jailed in 2005.
"So. Don't all get bored without me," Navalny told supporters in his last Twitter message from the courtroom before being handcuffed. "And most importantly, don't be idle."
He then handed his smartphone to his wife Yulia, hugged her and his mother, shook his father's hand and was led away by bailiffs.
"I believe that everything will be okay. We will win, and you please must also believe that everything will be great," she said.
Navalny, who emerged as a powerful new political force in mass anti-Putin protests, has dismissed the charges against him as absurd and a Kremlin set-up to end his political career.
Prosecutors in Kirov, a sleepy city 900 kilometres (560 miles) north of Moscow thronged by dozens of reporters for the hearing, had sought a six-year sentence.