Zurich, Auckland, Munich and Vancouver follow closely behind, according to Mercer's latest quality of living survey.
London only reached 40th in the rankings of 230 cities, dropping two places from last year because of its air pollution. New York came 44th and Baghdad was ranked lowest.
The survey is aimed at large multi-national employers and other companies to help them determine how they should compensate employees when placing them on international assignments or longer term re-locations.
Every year, Mercer experts produce the index by looking at living conditions in more than 440 cities across the world.
The conditions are based on 39 factors, grouped into 10 categories as follows: political and social environment, economic environment, socio-cultural environment, medical and health considerations, schools and education, public services and transportation, recreation, consumer goods, housing and natural environment.
Other European cities fared well in the rankings, with Zurich in Switzerland taking 2nd place and Munich, Dusseldorf and Frankfurt at 4th, 6th and 7th place respectively.
"If you look at the top-ranked cities closely, only minimal differences show - the quality of life is consistently very high," Christa Zihlmann from Mercer said on Wednesday.
"Vienna scores particularly highly because of the availability of suitable properties for expatriates, the range of theatre and music performances as well as restaurants and international schools," she added.
"We also observe local and regional developments and their impact - for example, security measures have been significantly increased in many cities in Europe as a result of the terrorist attacks in Paris and Copenhagen. This, of course, also affects the quality of life," Zihlmann said.
Vienna’s Mayor Michael Häupl and Vice-Mayor Renate Brauner (both Social Democrats) welcomed the news. "Once again Vienna has been selected as the city with the highest quality of life. This shows that the high social standards, good infrastructure and cultural offerings which Vienna offers are internationally recognized. It’s also a reminder to us that we have to continue to pursue the successful Vienna way - making our city vibrant, liveable and socially fair,” they said in a statement.
Critics of the Mercer rankings say that it only really applies to expatriates in managerial positions, whose high salaries enable them to enjoy all Vienna has to offer. Last year internet magazine Vice ran a piece claiming that actually Vienna is one of the 'crappest' cities in the world.