The Oscar-winning actress (39) and wife of Coldplay frontman Chris Martin headed a list of the year's style mavens that included Prince William's wife Kate, R&B star Rihanna, and the Kardashian family of TV reality show fame.
People said the list was compiled after soliciting input from the celebrity magazine's 42 million readers, its editors and fashion bloggers.
While Oscar-winner Paltrow won the best dressed title, fashion icon Kate Middleton - formally known as the Duchess of Cambridge - was named the woman with the best classic style.
Paltrow's stylist, Elizabeth Saltzman, told People that the actress was not a slave to trends. "She doesn't do fringe. She has a uniform. It's simple, not overdone," Saltzman said.
Emma Stone, the 23-year-old star of "The Amazing Spider-Man" and "The Help," was chosen as having the best red carpet style, while singer Rihanna was praised for taking the most risks in her fashion choices.
Actresses Jessica Alba (best jeans), Jennifer Lawrence (best under 25s), and Reese Witherspoon (best pregnancy) also made the top 10, along with Australian model Miranda Kerr.
Among men, honours went to actors Andrew Garfield, Brad Pitt, Colin Firth, Robert Pattinson, Chris and Liam Hemsworth and singer Jay-Z.
People also looked back at some of the fashion faux pas of 2012. The magazine recalled an orange lace dress worn with prominent black underwear by pop singer Fergie, and a floral floor-length dress worn by Sarah Jessica Parker that fashion blogger Heather Cocks said made the "Sex and the City" actress look like a cast member of polygamy TV reality show "Sister Wives."
People's special Best & Worst Dressed double issue hits newsstands on Friday and can be seen online at www.people.com/bestdressed.
