The Scots comedian and actor, affectionately known as the Big Yin, becomes a Sir in recognition of his services to entertainment and charity.
The accolade - handed out in the centenary year of the Order of the British Empire - comes 14 years after he was made a CBE in 2003.
The gong represents a high point in a notable year for the star, as he turns 75 in November. He has already been the subject of an ITV special celebrating his career this year and had three giant murals erected in his honour in his native city of Glasgow.
Connolly joked he should be called Sir Lancelot after being knighted because “Sir Billy doesn’t quite have the same ring” to it.
Upon learning of the honour, the comedian said he has been speculating about his new title and whether he will be referred to as Sir Billy or Sir William.
He told the BBC: “I am a little embarrassed but deep within me, I’m very pleased to have it.
“I feel as if I should be called Lancelot or something. Sir Lancelot, that would be nice. Sir Billy doesn’t quite have the same ring.”
Admitting he “hasn’t a clue” over how he will now be referred, he added: “I think it’ll be William, I don’t know if you get Sir Billy. I don’t have a choice.”
He said he would like the people he meets on the street to call him Billy or Bobby, “as usual”.
“Because I seem to have a very good rapport with the people in the street,” he added.
“And I’ve had it for years, and there’s a thing I love, if you see men digging in a hole, I like to say “Come on, get your back into it!”
“No wonder the country is in the state it’s in. And they swear and laugh and stuff, it’s good fun, I seem to have a great contact with the man in the street because I kind of am the man in the street.”
In recent times the comedian has been candid about his on-going health problems - he was diagnosed with Parkinson’s three-and-a-half years ago - and the impact it has had on his life.
The Glaswegian is increasingly dependent on his wife, Pamela Stephenson, to move around.
Life with Parkinson’s has meant Connolly, 74, can no longer play the banjo - the instrument that led to him first performing on stage as part of the folk duo The Humblebums in the late 1960s.
Born in the Anderston area of the city, but brought up in Partick and later Drumchapel, Connolly began his working life as an apprentice welder at Alexander Stephen and Sons shipyard in Linthouse.
Away from work, he bought his first banjo from Glasgow’s famous Barrowland market and soon began playing gigs in music pubs across the city, such as The Scotia.
“(Parkinson’s) is the first thing I think about in the morning because getting out of bed is quite hard,” he said in an interview with the Daily Mail earlier this year.
“It’s a weird thing because it stopped me playing the banjo and it stopped me smoking cigars. It seems to creep up on everything I like and take it away from me.
“It’s like I’m being tested... ‘Cope with that, cope with life without your banjo. Now I’m going to make your hand shake so you can’t tie your fishing flies any more.”
Connolly rose to international fame in the mid-1970s after moving away from music to focus on stand-up comedy performances, but singing and playing the banjo remained a key part of his routines.
He recorded several comedic songs that enjoyed commercial success, including a parody of Tammy Wynette’s song D.I.V.O.R.C.E., which he performed on Top of the Pops in December 1975.
He met Stephenson, an actor and comedian, in 1979 and the couple married 10 years later.
Scottish Secretary David Mundell said: “Billy Connolly’s knighthood celebrates a truly great Scot, the irrepressible ‘Big Yin’ who has entertained millions, but also his dedicated charity fundraising. He is an ambassador for both humour and humanity, and this recognition is richly deserved.”