The world's richest children's literature prize has been awarded to an organisation that has spent 20 years working to promote reading on the West Bank and the Gaza Strip.

The Palestinian Tamer Institute for Community Education beat contenders including Quentin Blake, Michael Morpurgo and Eva Ibbotson to take the Astrid Lindgren Memorial Award, which is worth SEK5m (£422,000). The prize, which is intended to increase interest in children's literature around the world, is given annually to an author, illustrator or an organisation that encourages reading.

Set up in 1989 in response to the educational needs of the Palestinian community during the first intifada, the Tamer Institute for Community Education works across the West Bank and the Gaza Strip with children and young people to develop alternatives and supplements to formal education.

The Astrid Lindgren judges praised the centre's "perseverance, audacity and resourcefulness", which they said had "stimulated Palestinian children's and young adults' love of reading and their creativity". "Under difficult circumstances, the Institute carries out reading promotion of an unusual breadth and versatility," they said. "In the spirit of Astrid Lindgren, the Tamer Institute acknowledges the power of words and the strength of books, stories and imagination as important keys to self-esteem, tolerance and the courage to face life."

The award was set up seven years ago in memory of the "deeply humanistic spirit" of the much-loved Swedish author Astrid Lindgren, creator of Pippi Longstocking, with previous winners including Maurice Sendak, Philip Pullman and Sonya Hartnett. The Tamer Institute will be presented with its prize on 2 June by Sweden's crown princess Victoria.