Greens-backed independent Alexander Van der Bellen swept 53.3 per cent of the votes against 46.7 per cent for his rival from the anti-immigration Freedom Party (FPOe), according to public television projections.
Hofer's likely defeat will see EU leaders breathe a sigh of relief in the wake of the anti-establishment tide sweeping many countries following the Brexit vote and Donald Trump's shock election triumph in the US.
"I am incredibly sad that it didn't work. I would have liked to watch over our Austria," the 45-year-old Hofer said in a message on Facebook.
The official result of the marathon election, which lasted nearly a year, is not expected before tomorrow when postal votes will be tallied.
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But the Freedom Party conceded defeat within minutes of the poll projections being released, shortly after voting ended.
The outcome deals a crushing blow to Hofer who already narrowly lost to Van der Bellen, 72, in a first runoff in May, an outcome that was contested by the FPOe and eventually annulled over ballot counting breaches.
"If the projections are right, the Austrian election result will be a clear victory for common sense against right-wing populism," said Germany's Vice Chancellor Sigmar Gabriel.
Observers had feared that a win for the Austrian far-right could trigger a domino effect with key elections next year in France, Germany and The Netherlands.
"Congratulations to the FPOe which fought bravely. The next elections will be theirs," tweeted the FPOe's French ally Marine Le Pen of the National Front, who is running for president in 2017.
There was palpable disappointment in the FPOe Vienna headquarters, where several people including Hofer's young daughter burst into tears after the results emerged.
Populist groups across Europe, on the right and the left, have benefited from a growing sense of unease about globalisation, multiculturalism, rising inequality, and biting austerity.