Biden, the former vice president, was next on 15.6 per cent of delegates and Minnesota Senator Amy Klobuchar claiming 12.6 per cent.
The results showed Sanders leading in the popular vote, but the delegate count is considered the official metric of success in the Iowa caucuses.
The outcome was a stunning success for 38-year old Buttigieg – the breakout star of the Democratic presidential race.
The openly-gay military veteran was little known outside of his hometown of South Bend, Indiana, just a year ago.
Speaking in New Hampshire after the results were released, an emotional Buttigieg said: “It validates for a kid somewhere in a community wondering if he belongs or she belongs or they belong in their own family, that if you believe in yourself and your country, there is a lot backing up the belief.”
Explaining why she supported Buttigieg, Iowa caucus-goer and university professor Lynda Barrow said: “He’s bright, he’s articulate, he’s even-keeled.
“We need someone who can appeal to independents and Republicans. We need a mainstream candidate.”
National polls still show Biden in the lead, but his performance in Iowa has cast doubt on the 77-year old’s ability to win the Democratic nomination.
His campaign events in Iowa drew far smaller and less enthusiastic crowds than rivals such as Sanders, Warren and Buttigieg.
“Joe Biden has a big problem,” David Axelrod, Barack Obama’ former chief strategist, said on CNN, describing his campaign as “aneamic”.
The problem Iowan voters had with Biden was summed up by Karen Krupp, 57, who said: “I would have supported the Biden of eight years ago. But I don’t think he could hold himself on a debate stage with Trump now.”
The party released the results just hours before US President Donald Trump delivers his State of the Union address in the US capital, denying Buttigieg and Sanders the usual burst of media attention they would enjoy after a successful caucus night.
“What happened last night is simply unacceptable,” Iowa Democratic Party chairman Troy Price said.
“As chair of the party, I apologise deeply for this.”
Although the results were delayed, Price insisted the raw data was secure and Democrats could have faith in the results.
Many prominent Democrats have called for Iowa to be stripped of its cherished “first-in-the-nation” voting status and to abandon its arcane caucus system in favour of primary voting.
“This is a conversation that happens every four years, there’s no doubt that conversation will happen again,” Price said.
Trump ridiculed the Democrats for their caucus fiasco, describing the delay as “an unmitigated disaster”.
Buttigieg still faces an uphill fight to secure the party’s nomination. Polls show him struggling to attract support among African American and Hispanic voters, crucial components of the Democratic coalition.
Matthew Knott is North America correspondent for The Sydney Morning Herald and The Age.