Judge Sergei Blinov said the anti-corruption campaigner had defrauded a timber firm.
Navalny has always insisted the trial was politically motivated, due to his opposition to President Vladimir Putin.
Minutes before he was handcuffed and led away, he urged his supporters to continue his struggle, tweeting: “Don’t sit around doing nothing.”
The 37-year-old had been a leading campaigner against Mr Putin’s United Russia party, and regularly blogged about allegations of corruption.
Navalny had recently said he would like to stand for president. He has already registered his candidature for Moscow mayor.
The BBC’s Moscow correspondent Daniel Sandford says that when the sentence was handed down, there were tears from his supporters and an explosion of anger on the social networking sites that he has used so effectively.
Anti-Putin activist and former cabinet minister Boris Nemtsov told reporters the trial was “completely fabricated from start to finish, and even the judge could not say what the reason for the crime was”.
His supporters in Moscow have vowed to stage protests against the verdict later on Thursday.
The European Union has condemned the verdict, with a spokesperson for the EU’s top foreign policy official, Catherine Ashton, saying the embezzlement charges were unsubstantiated, and that his jailing posed “serious questions as to the state of the rule of law in Russia”.
Navalny arrived at the courtroom in Kirov to hear the verdict after a 12-hour overnight train journey from Moscow.
Our correspondent said Navalny smiled in a resigned manner when the almost inevitable guilty verdict came.
His wife, Yulia Navalnaya, said her husband knew he would get a non-suspended sentence and was mentally prepared to go to prison.
Navalny was found guilty of heading a group that embezzled 16m rubles ($500,000, £330,000) worth of timber from the Kirovles state timber company while working as an adviser to Kirov’s governor Nikita Belykh.
The prosecution had asked for a six year jail sentence, but judge Sergei Blinov decided on five years, and said there were no extenuating circumstances that would warrant keeping Navalny out of prison.
Navalny’s co-accused, Pyotr Ofitserov, was also found guilty, and given a four-year jail sentence.
“Navalny… committed a grave crime,” said Judge Blinov as he delivered the sentence.
Judge Blinov said he found the testimony of the main prosecution witness, Vyacheslav Opalev, to be “trustworthy and consistent”.
Navalny insists that Mr Opalev spoke against him out of revenge, because Navalny had recommended he be fired and his company investigated for corruption.
After the verdict, Navalny tweeted: “So that’s it. Don’t get bored without me. Most importantly, don’t sit around doing nothing. The toad won’t get off the oil pipe by itself.”
In his LiveJournal blog on Wednesday Navalny said: “The current authorities are not a big, healthy fish, but rather a bloated fish or Latin American toad, which puffs itself up when it sees danger, with the help of television.”
In an unusual step, the court allowed the whole trial to be broadcast live online.
State television has only shown limited interest in the process despite Navalny’s prominence, but online the trial has been followed extensively.
Alexei Navalny tweeted his views on the case from the courtroom
Mr Navalny came to public attention when he inspired mass protests against the Kremlin and President Vladimir Putin in December 2011.
He is now one of the key figures of the opposition – a thorn in the side of the political establishment, campaigning against the endemic corruption, our correspondent says.
Mr Navalny has also coined a phrase to describe the ruling party United Russia that has stuck in everyone’s minds – “the party of crooks and thieves”.