Lassila was chosen from an impressive list of finalists for the award, including Australian Commonwealth Games stars Alicia Coutts (swimming), Matthew Cowdrey (Paralympic swimming), Jamie Dwyer (hockey), Anna Meares (cycling) and world No.1 Laser sailor Tom Slingsby.
Lassila's award caps off an outstanding year which saw her produce a memorable performance for Australia to win gold at the 2010 Olympic Winter Games in Vancouver, Canada.
Senator Arbib said Lassila's performance was inspiring for other sportspeople and the wider Australian community.
"Lydia has proven herself to be a world class champion both on and off the ski slopes," Senator Arbib said.
"Her gold medal performance in Vancouver captured the hearts of all Australians and stands as one of the truly great moments in Australian sport.
"The AIS continues to be an international leader, working with sports to develop elite talent like Lydia who excel on some of the world's toughest sporting stages."
Lassila becomes the 27th winner of the Institute's top award, joining some of Australia's best athletes.
Previous winners include walker Kerry Saxby-Junna (1986-89), swimming greats Michael Klim (1998 and 1999) and Petria Thomas (2001 and 2002) and gymnast Philippe Rizzo (2001 and 2006).
Story courtesy Australian Olympic Committee