Nokia claims the new model can record "details never thought possible from a smartphone".
Analysts have their doubts that the big megapixel lens will work for Nokia.
Francisco Jeronimo, a mobile phone analyst at IDC said "Nokia may consider it the best smartphone out there but I doubt it will be enough to convince many users to jump platform from Android or iOS which accounted for 92% of global shipments in the last quarter.
"Nokia needs to convince consumers that this new handset outperforms others in low-light conditions, otherwise they would only really notice the difference if they zoomed in on the images on a large screen or printed out a poster" he added.
Nokia claims that the Lumia 1020 allows owners to adjust focus, shutter speed and white balance via a new user interface users will also be able to zoom in and reframe their photos without worrying about the image quality suffering.
Analysts claim that despite the rich camera features there is "no guarantee that it would be a bestseller"
Market research firm IDC recently carried out a survey of smartphone owners in 25 countries to identify what factors were most likely to drive future purchases.
The results placed camera resolution 15th on a list of 23 features. Audio quality for voice, battery life, device security and browsing came top of the poll.
The Lumia 1020 marks the second time Nokia has fitted a 41MP sensor to one of its phones.
The BBC reported that last year Nokia launched the Pureview 808 model, but its appeal was limited by the fact it ran the ageing Symbian operating system for which few developers are still writing software. The new handset instead runs on Microsoft's Windows Phone platform which has more than 160,000 apps.
Unlike its predecessor, the Lumia 1020 can save both types at the same time, meaning that the owner does not need to worry about switching settings.
In addition, the handset's video recording capabilities take advantage of the extra resolution, allowing the user to zoom in four times while recording a 1080p high definition video without losing quality, and six times into a 720p version.
It also adds optical image stabilisation by mounting the lens system on ball-bearings and using a gyroscope and motors to counteract any movement to prevent the problem of camera shake.
Stephen Elop, chief executive of Nokia: "We've also made the back the new front"
However, all this comes at a premium price. When it launches in the US it will cost $300 (?198) on top of a two-year contract.
One analyst suggested Nokia wanted the new handset to act as a "halo device", attracting shoppers to other products in its range.
"Nokia is positioning the Lumia 1020 as a flagship product for the next generation of smartphones," said Ben Wood, chief of research at the CCS Insight consultancy.
"Alone it will not transform Nokia's fortunes but the significant media coverage it will generate centred on its innovative camera technology will be a major boost not only to the Lumia brand but also the Windows Phone platform.
The BBC reported that Samsung recently unveiled the Galaxy S4 Zoom - a handset with a 10x optical zoom which extends out of the device to allow users to close in on a scene at the time of the snap. This feature is more commonly found in compact cameras than smartphones.
Meanwhile, HTC introduced what it calls an "ultrapixel" sensor to its flagship One model.
Each pixel on its sensor is bigger than normal, a feature that the Taiwanese firm says allows it to offer high-quality low-light shots. But the trade-off is that fewer pixels can be fitted in. As a result its 4MP resolution means image quality deteriorates more quickly if users zoom in on photos to crop the shots.