Revealed: The best place to live in whole of Scotland
Residents tend to have higher-than-average earnings, a greater chance of being employed and better health, according to the research. The area also benefits from the best education results and has a low rate of house-breaking.
The Bank of Scotland data assesses the quality of life in regions across the UK by examining a range of factors which include housing, environment and education.
Shetland was followed by Aberdeenshire and East Dunbartonshire.
The Orkney Islands came fourth on the list for quality of life, followed by East Renfrewshire, East Lothian, the Borders, Midlothian, Moray and Angus.
Andy Steven, islands manager at VisitScotland, said: "It doesn't surprise me that Shetland has ranked top in this survey as we are all very proud of what the islands have to offer. It's yet another endorsement for the community and, hopefully, it will inspire visitors to take a trip and see for themselves that Shetland is a must-see, must-return destination."
Properties in six of the top ten areas in the report sell for more than the average Scottish house price of 165,921. Property prices in East Renfrewshire are the highest in Scotland, averaging 223,662.
However, Shetland property prices for the year to September 2008 were 24 per cent lower than the Scottish average.
Martin Ellis, chief economist at Bank of Scotland, said of the figures: "The Shetland Islands not only have the best quality of life, but lower-than-average house prices mean householders have good value for money housing."
Throughout the UK, the Shetland Islands were ranked 109th.
According to the research, Elmbridge in Surrey is the area with the highest quality of life in Britain. At the other end of the Scottish scale, the survey ranked Glasgow City as having the lowest quality of life, with just 49 per cent of owner-occupiers, the highest amount of traffic flow per square kilometre, low percentages of people in "fairly good health" and poor life expectancy.
But John Curtice, professor in politics at the University of Strathclyde and director of its social statistics laboratory, said that one area of difficulty in surveys measuring of quality of life was the elements used in the calculations.
"These sorts of statistics are generally an index of items trying to measure in some objective way how easy or difficult a life people experience," he said. "But how you work out the pecking order for these sorts of things depends on what you take into account.
"Then there is the question of how much weighting you give to each element.
"When it comes to Shetland, house prices will be relatively low and health will be pretty good.
"But if you were to take mean temperatures or the average wind speed, or even hours of daylight during winter – which many people will say are pretty important – Shetland perhaps does not do so well."