The song, performed by The Pogues and Kirsty MacColl and originally released in 1987, reached the landmark this December and has become the 126th song to achieve the feat.
The single peaked at number two in the UK single charts when it first came out. It has managed to enter the top 40 every Christmas since 2005 due to online downloads.
Martin Talbot, MD for the Official Charts Company, said: "It is apt that in the year of its 25th anniversary, 'Fairytale Of New York' has entered into the pantheon of the UK's all time favourite singles to become the latest - and 126th - million selling single in the history of the British charts.
"It has been a festive favourite ever since it was first released in 1987, so it is great that it can now claim this new honour."
Nine other songs sold their millionth copy during 2012, including Aerosmith's 'I Don't Want To Miss A Thing', Gotye's 'Somebody That I Used To Know', Carly Rae Jepsen's 'Call Me Maybe' and Rihanna's 'We Found Love'.
Watch the video for 'Fairytale of New York' below: