Skeletal remains of the 3ft-tall creature were found in a cave on the island of Flores, alongside sophisticated stone tools and evidence of fire.
The discovery of the female specimen, given the name Homo floresiensis, caused a sensation when it was announced last October.
She is thought to have lived 18,000 years ago and had a mixture of traits from an early human ancestor, Homo erectus, and people living today.
Examination of her teeth showed she was fully grown at the time of her death - yet she stood barely 36 inches tall.
Scientists nicknamed her "the hobbit" after the dwarf-like characters in JRR Tolkein's mythical trilogy The Lord Of The Rings.
But the find was controversial from the start. Some experts dismissed the claim that Homo floresiensis represented a previously unknown branch of the human family tree.
The remains belonged either to a pygmy version of a known human species, or an individual with an abnormally small skull due to a birth defect, it was argued.
Now new evidence shows that the "hobbit", catalogued by scientists as LB1, almost certainly really does belong to a novel human species.
Scientists used computer tomography (CT) scans of the creature's skull to create a three dimensional virtual model of the surface of its brain, called an endocast.
A physical latex model was also made. Together, they provided a detailed map of imprints left on the inside of the skull which corresponded to the brain's outer features.
Professor Dean Falk, from Florida State University, Tallahassee, USA, who led the research, said: "I thought the Homo floresiensis brain would look like a chimp's. I was wrong. There were fancier things on LB1's brain."
The endocasts revealed a large and surprising swelling of the frontal lobe, together with other anatomical features suggestive of higher thinking processes.
They might explain the tools and signs of co-operative activity found in the creature's cave, Professor Falk's team reported in the journal Science.
Earlier scientists had wondered how a creature with a brain the size of a grapefruit could display human-like intelligence.
The researchers compared the "hobbit" endocast with others including those from chimpanzees, an adult female Homo erectus, a present-day woman, an adult female pygmy, and a microcephalic - a person with an abnormally small skull.
Professor Falk said: "The scaling of brain to body isn't at all what we'd expect to find in pygmies, and the shape is all wrong to be a microcephalic. This is something new."
The endocast findings showed that Homo floresiensis was closely related to Homo erectus.
It has been suggested that the creature was descended from a race of Homo erectus which reached Flores by sea and evolved into "hobbits" in response to limited food supplies on the isolated island.
Alternatively, it was possible the two species shared an unknown, small-bodied and small-brained ancestor.
At the time LB1 was alive, a collection of other bizarre creatures also roamed Flores. They included dwarf elephants the size of ponies, rats as big as dogs and giant lizards even bigger than the 10ft long Komodo dragons which still inhabit the region today.
Further discoveries of charred bones and stone tools on Flores suggest that "hobbits" lived there from about 95,000 years ago to at least 13,000 years ago.
Some experts have not ruled out the fantastic possibility that the creatures might still be living in the impenetrable forests and cave systems of south-east Asia.
Dutch explorers who colonised Flores 100 years ago were told colourful stories of a human-like creature local inhabitants called "ebu gogo".
They too stood about three feet tall. The tales described how they could be heard "murmuring" to one another, and how, parrot fashion, they repeated back words spoken to them.
However, most of the prehistoric fauna on Flores is thought to have been wiped out by a volcanic eruption 12,000 years ago.
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