The 10m-diameter drill-head tore through the rock to cheers and applause from watching workers.
The 57km (35 mile) Gotthard rail tunnel has taken 14 years to build and is not likely to open before the end of 2016.
But it is expected to revolutionise transport across Europe, providing a high-speed link between the north and south of the continent.
Eventually, trains will travel through it at speeds of up to 250km/h (155mph).
Journey times between Zurich and Milan are likely to be slashed by as much as one-and-a-half hours.
The event, which took place shortly after 1415 (1215 GMT), was broadcast live on Swiss TV and watched by transport ministers across Europe.
The 9.8bn Swiss franc (£6.4bn; $10.3bn) project will take up to 300 trains each day underneath the Alps.
The length of the Gotthard tunnel exceeds the 53.8km Seikan rail tunnel linking the Japanese islands of Honshu and Hokkaido and the 50km Channel Tunnel linking England and France.
Many of the workers watched as the two ends of the tunnel met 2,000m underground.
The foreman lifted a statue of Saint Barbara, the patron saint of miners, through a small hole in the drilling machine.
Some 2,500 people have worked on the tunnel and eight people have lost their lives during its construction.
A minute's silence was held as the workers' names were read out during a ceremony marking the tunnel's completion.
Chief construction officer Heinz Ehrbar said that amid all the celebration, it was "very important that we remember that not all of our workers can be with us, but we are proud and we will be very happy this evening."
Switzerland is one of Europe's major junctions for freight and the tunnel is part of a larger project aiming to move cargo off the roads and on to rail.
Improvements on the northern and southern approaches to the new Gotthard tunnel have been postponed, so trains will run on existing track there.