The announcement was made by H E Johnson Toribiong, President of the Republic of Palau, at a meeting in late September of the UN General Assembly in New York.
The sanctuary covers the full 230,000sq miles of Palau's Economic Exclusion Zone, which stretches 200 miles out from its coasts.
Within this region, all commercial shark fishing is banned. Previously, protection measures existed but certain levels of shark-fishing were allowed.
The move represents a dramatic put-down to marine bills tabled in Palau in March, which would have relaxed shark-protection laws had they gone through.
At the UN meeting, President Toribiong also called on other nations to follow his lead and establish a global ban on shark-finning practices.
"Not all nations consider shark fins delicacies," he told the BBC, "and we feel that the need to protect sharks outweighs the need to enjoy a bowl of soup."
The sanctuary announcement has been welcomed by conservationists as a seismic development in shark protection.
"The time for setting aside tiny areas of sea that only protect a few sedentary species is over, and it [the sanctuary] is important because it shows the way in terms of putting large areas aside," said Carl-Gustaf Lundin, head of the IUCN's Marine Programme.
Doubts have been expressed about Palau's ability to police its Economic Exclusion Zone, with just one fast offshore patrol boat. According to the BBC, a recent aerial survey logged some 70, mostly illegal, fishing-boats in the area.
Other methods can be deployed, however. The IUCN was "exploring what options there are for monitoring remotely at low cost", said Lundin.
The US Government, he added, had been "sharing lists of illegal vessels with established fishing companies, so that they can report on their dishonest or non-decent peers".
And it was not necessarily vital to catch vessels at sea. "Everyone needs to land their fish, so as long as you have most nations signed up to oppose illegal fishing, your chances of catching them are pretty decent."
Palau remains one of the few countries that still supports whale-hunting. The President told the BBC that he had planned to announce a change in this area at the UN meeting, but needed to wait.
In the light of the recent change of government of its close ally Japan, President Toribiong wanted to have bilateral meetings with that country first.
Related links
Concern for Palau sharks
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