The big ticket purchase was seen by some as a move by Facebook to strengthen its defenses against Google and blazingly hot newcomer Pinterest in the weeks ahead of what promises to be a history-making stock market debut.
"For years, we've focused on building the best experience for sharing photos with your friends and family," Facebook co-founder Mark Zuckerberg said in announcing the deal.
"Now, we'll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests."
Zuckerberg called the acquisition "an important milestone for Facebook because it's the first time we've ever acquired a product and company with so many users" but promised it was a rare acquisition.
An Instagram application tuned to Apple's iPhones, iPads, and iPod touch devices has been downloaded more than 27 million times since the first version was released in late 2010 by the San Francisco startup.
Instagram co-founder Kevin Systrom released the figure while providing a glimpse last month at a version of the application being tailored for smartphones power by Google-backed Android software.
The free mini-program lets people give classic looks to square photos using "filters" and then share them at Twitter, Facebook or other social networks.
Apple crowned Instagram its app-of-the-year for 2011.
"We're psyched to be joining Facebook," Systrom said in a blog post Monday on the Instagram website.
"It's important to be clear that Instagram is not going away," he continued. "We'll be working with Facebook to evolve Instagram and build the network."
Instagram's roster of backers includes Twitter co-founder Jack Dorsey.
Facebook users flood the world's largest social network with images to share with friends, but the website hasn't proven to be an ideal stage for organizing pictures around topics -- a forte that has made Pinterest a star.
"Facebook is pushing into the Pinterest space," said analyst Tim Bajarin of Creative Strategies.
"The thing about Instagram and Pinterest is that they are really interesting in the context of posting pictures around topics," he continued.
Silicon Valley analyst Rob Enderle of Enderle Group said that Facebook is building a defense against Pinterest, which has been luring people's attention away from the social network.
"Instagram is a reasonable competitive hedge against Pinterest," Enderle said.
"At the heart of both startups is picture indexing -- they are just handled differently."
While Bajarin referred to the billion-dollar price tag for Instagram "boggling," Enderle contended that it could prove to be a bargain if it helps Facebook shine for its IPO on Wall Street.
Facebook in February filed for a stock offering and could raise as much as $10 billion in the largest flotation ever by an Internet company on Wall Street.
Facebook -- the leading social network in all but six countries, notably China and Russia -- said it has more than 845 million users, including 483 million who log in daily.
Facebook's value has been estimated at between $75 billion and $100 billion.
"The Instagram buy could be worth tens of billions of dollars if it holds off Pinterest and Facebook remains on top," Enderle said.
"Given what Facebook is trying to do -- get a massive valuation when it goes public -- a billion dollars is a trivial sum."