The plant-eating marsupial would have been the size of a four-wheel drive car and weighed three tonnes, experts say.
Its bones were found on a farm in north-eastern Australia's Queensland state.
The find is one of Australia's most significant pre-historic discoveries ever because the skeleton is complete, experts say.
It is the first time a complete skeleton of a Diprotodon optatum has been uncovered.
The animal was widespread across Australia about 50,000 years ago, when it is believed the first indigenous people lived.
'Wombat on steroids'Prof Mike Archer, a professor of biological science at the University of New South Wales, described the discovery as extraordinary.
"We found the most gigantic marsupial ever known," he told the BBC.
"These were very huge animals but with pouches. If one tried to visualise what this thing looked like, you'd have to sort of think of a gigantic wombat on steroids."
The remains were unearthed at Floraville Station in northern Queensland - a region that has attracted scientists and fossil hunters for decades.
Researchers believe the area could contain a huge graveyard of mega-fauna that once roamed the Australian continent.
Every discovery offers more clues as to how and why they became extinct, possibly owing to hunting by humans or more likely because of a changing climate.
The specimen will be taken to the Riversleigh Fossil Centre, a World Heritage site in Queensland.
It is home to an array of prehistoric treasures, including the remains of a tree-dwelling crocodile, a carnivorous rat kangaroo and a marsupial lion.
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