Hu Jia, one of China's best-known dissidents, has won a European Union human rights prize despite a warning from Beijing that selecting the political prisoner would damage relations.

His wife and supporters welcomed the news that MEPs had picked him for the Sakharov prize. Its previous recipients include Nelson Mandela and the East Timorese leader Xanana Gusmao.

"Hu Jia is one of the real defenders of human rights in the People's Republic of China," said Hans-Gert Poettering, the president of the European parliament.

"The European parliament is sending out a signal of clear support to all those who support human rights in China."

Hu was sentenced to three and a half years in jail this spring on subversion charges amid what human rights campaigners described as a coordinated crackdown on activists ahead of the Olympics. The authorities said he planned to work with foreigners to disturb the games.

Hu's wife, Zeng Jinyan, welcomed the award as a sign that Europe was paying attention to human rights in China and was concerned about her husband's case.

Zeng, who has been under house arrest along with the couple's baby, told the Guardian: "It is also a [sign of] approval of his work. I guess he must be very glad if he knows about it.

"I don't know whether it will help [with] his sentence; I hope so but I dare not have too much hope."

She said the family's situation was getting better and she was able to go out comparatively freely. She visited Hu yesterday and guards let him hold their child for the first time.

"He was so happy to meet the baby," she said.

Supporters have been concerned about Hu's health because he suffers from liver disease. Zeng said she was waiting to see if the prison, which provides his medicine, would approve a doctor's recommendation of new drugs.

The activist's lawyer told the Associated Press news agency the award showed that "the Chinese government should support and encourage people like Hu Jia, because you can never silence voices of opposition".

There have been some signs recently of the authorities relaxing strict controls on dissidents now that the Olympics are over.

But in a letter to Poettering last week, China's ambassador to the EU wrote: "If the European parliament should award this prize to Hu Jia, that would inevitably hurt the Chinese people once again and bring serious damage to China-EU relations."

Song Zhe said relations were only just recovering from the backlash in China triggered by protests ahead of the Olympic games, warning: "Not recognising China's progress in human rights and insisting on confrontation will only deepen the misunderstanding between the two sides."

Qin Gang, a spokesman for the foreign ministry, told a press conference in Beijing: "To issue an award to such a criminal is interference in China's judicial sovereignty and totally against the initial purpose of this prize."

Hu began by focusing on the rights of HIV/Aids patients before developing an interest in issues ranging from Tibet to human rights more generally.

This year's other candidates for the €50,000 (£39,500) prize were from Belarus and Congo.