The Liberty Medal, one of Philadelphia's highest honors, is bestowed upon those of "courage and conviction who strive to secure the blessings of liberty to people around the globe."
Past recipients include Nelson Mandela, Sandra Day O'Connor and Steven Spielberg.
Ali, 70, was honored not only for being a boxing champion but for championing religious freedom, freedom of speech and racial equality.
Speakers at the ceremony outside the Constitution Center included basketball great Dikembe Mutombo, actor Terrence Howard and Ali's daughter, boxer Laila Ali. But perhaps the most moving speech was given by Joe Louis Barrow II, son of legendary boxer Joe Louis.
"Knowing [Ali] since I was a little boy has given me a ringside seat to history," Barrow said.
Barrow spoke of how his father had volunteered to serve in World War II whereas Ali refused to serve in the Vietnam War, citing his religious beliefs.
"In different ways, you both defended the ideal of the Constitution," he said. "And time has shown you were both on the right side of history."
Barrow choked up as he recalled how on the day of his father's funeral, Ali performed a magic trick just for him.
"You put your large hand on my very small shoulder, and on that day, far away from the bright lights, you gave a scared little boy the courage to face the challenges of a lifetime," he said. "For that, I can simply say, 'Thank you. I love you.' "
Because Parkinson's disease has made it difficult for Ali to speak, his wife, Lonnie, spoke on his behalf.
She described how honored Ali felt to receive the Liberty Medal and how his confidence, conviction and outspoken demeanor were possible only because he lived in a country that afforded him freedom.
"Muhammad often challenged laws, policies and social norms in this country, but it is this country's founding principles that enabled him to stand up for his personal principles," she said.
Lonnie Ali said that "We the people," the first words of the U.S. Constitution, also hold great meaning for her husband.
"Muhammad has always believed that he lives within the great circle of humanity. He is, indeed, of the people," she said. "His cares, his concerns, his well- wishes are all focused on the people within that great circle - we the people."
Contact Stephanie Farr at firstname.lastname@example.org or 215-854-4225. Follow her on Twitter @FarFarrAway. Read her blog at PhillyConfidential.com.