His work is a visually stunning 3D tale of an Indian boy adrift in the ocean for months with a Bengal tiger.
With his second Oscar win, Lee brings focus back to India, whose culture and ethos are an important part of the narrative and unlike previous Academy-winner "Slumdog Millionaire" which earned some brickbats for promoting slum porn, Lee has presented Pondicherry and Munnar beautifully through his 3D lenses.
Lee, 58, beat Spielberg ("Lincoln"), Haneke ("Amour"), David O Russell ("Silver Linings Playbook") and indie filmmaker Benh Zeitlin ("Beasts of the Southern Wild") to win his second Academy in the directing category.
"I really need to share this with everybody who worked in 'Life of Pi'. I need to thank Yann Martel for writing this marvelous book...," Lee said in his speech before ending it with a 'Namaste'.
The auteur, a five-time Oscar nominee, previously won the trophy for his 2005 gay cowboys drama "Brokeback Mountain". Like "Life of Pi", his "Crouching Tiger, Hiden Dragon" was nominated for best picture and directing honours.
In the film, an adaptation of Martel's Booker-prize winning novel, Lee took on the challenge of filming the movie, mostly set in the ocean, with an almost entirely Indian casts of newcomer Suraj Sharma, Irrfan Khan, Tabu and Adil Hussain.
He spent four years translating the book to the screen that included building an enormous wave tank to shoot ocean scenes besides creating a terrifyingly believable tiger through the help of CGI.
The movie narrates the story of Pi, a zookeeper's son in Pondicherry, who finds the world he knows swept away when his family is killed in a storm while on their way to Canada. Pi escapes, set adrift in a lifeboat that is also the refuge of an enormous Bengal tiger.
Lee made several trips, including one to promote the film, to India to research and cast the movie. He chose the then 17-year-old newcomer Suraj to play the lead from 3000 hopefuls.
The film also won three more trophies for the best cinematography, visual effects and best music.
Claudio Miranda won the best cinematography trophy for his stunning camera work in the 3D movie.
A nervous Miranda said 'Life of Pi', which was largely shot in a huge water tank, was "quite a piece" to make.
"Wow, this movie was quite a piece to make. We did it....I can't even speak," said a nervous Miranda before ending his speech by thanking director Lee, his wife and daughter.
The film also won in the visual effects category with Joe Letteri, Eric Saindon, David Clayton and R Christopher White taking home the golden statuette.
The team paid tribute to the Rhythm & Hues, the company behind the VFX, which has filed for bankruptcy.
The awards were presented by 'The Avengers' team Robert Downey Jr, Chris Evans, Mark Ruffalo, Chris Hemsworth, Jeremy Renner and Samuel L Jackson.
The music director of the film, Mychael Danna, won an Oscar in the Best Original Score category for his work in Ang Lee's 'Life Of Pi', about a shipwrecked Indian boy.
Danna has had a very close collaboration with Lee as they have worked together in the past for films like 'The Ice Storm' and 'Ride with the Devil'.
Danna, who is married to Indian origin Aparna Dana, spent more than a year working on the music for the film with Lee, at first discussing the philosophical elements of Yann Martel's novel, on which the movie is based.
The orchestra was recorded in LA on the 20th Century Fox lot, while various other elements were recorded around the world.
The first composed piece for the film was the song 'Pi's Lullaby', which he wrote with the South Indian singer Bombay Jayashri.
James Bond film 'Skyfall' won its first Oscar in three decades by tying up for best sound editing trophy with Osama bin Laden manhunt drama 'Zero Dark Thirty' while 'Les Miserables' won in the sound mixing category.
Skyfall's Per Hallberg and Karen Baker Landers tied up with Zero Dark Thirty's Paul NJ Ottosson for the best sound editing Oscar at the 85th Academy award.
Tom Hooper directed musical scored a win in sound mixing category for Andy Nelson, Mark Paterson and Simon Hayes.
Joe Wright's 'Anna Karenina' won the Oscar for the best costume while the award for best makeup and hairstyling went to musical 'Les Miserables'.
'Anna Karenina' is a epic adaption of Leo Tolstoy's novel of the same name. The best costume Oscar was won by Jacqueline Durran.
'Les Miserables', the Top Hooper directed musical, again an adaptation of Victor Hugo's French novel, registered an early win in the makeup and hairstyling category for Lisa Westcott and Julie Dartnell.
Christoph Waltz, Anne Hathaway win Oscar for best supporting roles
Christoph Waltz has won the Oscar for best supporting actor for his role of a German bounty hunter in Quentin Tarantino's 'Django Unchained' and Anne Hathaway took home the
Best Supporting Actress Oscar for her role of a mother-turned-prostitute, Fantine, in Tom Hooper's musical 'Les Miserables'.
This is the 56-year-old Austrian-German actor's second Academy award in the same category. He previously won the trophy in 2009 for Tarantino's 'Inglourious Basterds'.
"I thank Tarantino, the creator of this awe inspiring world (Django Unchained)," said Waltz while accepting his trophy.
Waltz saw off competition from Alan Arkin for 'Argo', Robert De Niro for 'Silver Linings Playbook', Philip Seymour Hoffman for 'The Master' and Tommy Lee Jones for 'Lincoln'.
In 'Django Unchained', an American epic western film, Waltz portrayed Dr King Schultz, a German bounty hunter in the pre-Civil War South, who buys a slave to assist him with his work.
Waltz also thanked his co-stars Jamie Foxx, Leonardo DiCaprio, Kerry Washington and Samuel L Jackson in his winning speech.
The 30-year-old, Anne Hathaway, was a favourite to win the trophy for the difficult role, which saw her chopping off her tresses and losing about 25lb.
This is Hathaway's first Academy Award, she was previously nominated for her 2008 movie 'Rachel Getting Married'.
Her award was announced by last year's best supporting Oscar winner Christopher Plummer.
Looking stunning in a baby pink gown, Hathaway thanked her husband Adam Shulman, director Tom Hooper, fellow nominees and made a special mention of co-star Hugh Jackman in her speech.
'It came true... I hope sometime in near future. The misfortunes of Fantine will only be found in stories and not in real life,' Hathaway said.
She beat actresses Amy Adams ('The Master'), Sally Field ('Lincoln'), Helen Hunt ('The Sessions') and Jacki Weaver ('Silver Linings Playbook') to take home the trophy.
The musical drama, based on Victor Hugo's French historical novel, saw Hathaway play a mother who is fired from her workplace and is later forced into prostitution in order to take care of her daughter.
'Amour' wins best foreign film Oscar
Austrian 'Amour' (Love), a poignant drama about a retired music teacher's desire to die as she struggles with old age, won the best foreign film trophy at the 85th Academy Awards.
The Michael Haneke directed movie, also nominated for the best picture and director, was a strong favourite to win the foreign film Oscar.
The story revolves around a retired music teacher and her husband of 60 years as they struggle with the debilitating effects of two strokes on both her health and her quality of life.
As Georges cares for the increasingly unhappy Anne, the pair finds the nature of their life together irrevocably changed.
'Amour' saw off competition from Norway's 'Kon-Tiki', Chile's 'No', Denmark's 'A Royal Affair' and 'War Witch' from Canada.