It's the first time a European city has topped the rankings of the Economist Intelligence Unit annual global survey.
The worldwide league table ranks 140 cities on a range of factors, including political and social stability, crime, education and access to healthcare.
In the survey, Manchester saw the biggest improvement of any European city, rising by 16 places to rank 35th.
Manchester's rise puts it ahead of London in the rankings by 13 places, the widest gap between the two cities since the survey began two decades ago.
The Economist said Manchester's jump in the rankings was due to an improved security score.
The survey was criticised last year for demoting Manchester after the Manchester Arena attack which killed 22 victims.
This year, survey editor Roxana Slavcheva said Manchester had "shown resilience in the city's recovery from a recent, high-profile terrorist attack, which previously shook up stability".
Ms Slavcheva said security had also improved in "several western European cities" and Vienna's top place in the rankings reflected "a relative return to stability across much of Europe".
According to the survey, nearly half of the cities have seen their liveability ranking improve over the past year.
Melbourne, which was ranked second in this year's global rankings, had previously come top for seven years running.
Two other Australian cities also made this year's top ten: Sydney and Adelaide.
At the other end of the scale, war-torn Damascus in Syria was ranked the least liveable city, closely followed by Dhaka in Bangladesh and Lagos in Nigeria.
The Economist said that crime, civil unrest, terrorism or war played a "strong role" in the ten-lowest scoring cities.