The prize is awarded by the Spanish publisher Planeta and is one of the most important in the Spanish-speaking world. The prize money is one million euros, equivalent to eleven million kronor.
Allende says she was motivated to write the sequel by the state of the world.
"I see many democracies threatened by extreme nationalism and fascism," she said at the award ceremony.
The author, who has sold more than 80 million books and been translated into 42 languages, wrote "The House of the Spirits" in Venezuela in the early 1980s while in exile from Augusto Pinochet's military dictatorship in Chile.
Her father was a cousin of President Salvador Allende, who was assassinated during the military coup.
