The 17-year-old impressed the panel of judges, including guest judge Play it Strange chief executive and Split Enz member Mike Chunn, in the final of the three-week music battle in the Youth Booth on Friday night.
The Arrowtown teenager sang and played on the guitar California by Phantom Planet, then her original compositions Wolves and Moons, River Song and Rise, her encore duet with friend and singer Jonny Mah.
Arrowsmith also won the Best Acoustic Artist prize of a $200 voucher for musical equipment from It Might Get Loud Music Company.
"I'm so surprised; I had no idea; I'm so honoured. I'm so excited to be able to record," Arrowsmith said.
"I love playing to people - that's my passion."
Chunn said all finalists were "consistently excellent" and choosing the Ultimate Muso was a difficult task.
However, Arrowsmith had "projection - her voice is really strong [and] her self-belief. She has a confidence."
Other winners on the night were the Fletcherz.
Sam Maxwell (16), George Hartshorn (15), Jacob Sheehy (16) and Damon Spijkerbosch (15) were hailed Best Band and won a coveted warm-up slot on stage for New Year's Eve.
Emily Burns (18) won Best Vocal Performance and Max Gunn (17) won Best Original Song for Tick Tock.
Chunn told the audience of more than 90 people in the packed Youth Booth it was a "shockingly good experience coming to Queenstown and hearing students playing their songs".
Chunn later told the Queenstown Times he was amazed to "hear music that is sophisticated and honest from one school, basically".
Hosts Caleb Dawson-Swale (18) and Tom Rowan (18) amused the crowd of peers and parents and guest performer Yuki Brown sang and played guitar while the judges deliberated.
Wakatipu Youth Trust youth worker Fi Sawers thanked everyone who supported the annual competition, especially Creative Queenstown for its funding.
