The perennial Christmas favourite, a heartfelt tale of festive excess with explosive lyrics, reached the seven-figure milestone after getting to number 12 in the chart this Christmas, the Official Charts Company said.
The song by the band - led by distinctive singer Shane MacGowan - and singer-songwriter McColl, who died in a boat accident in Mexico aged 41 in 2000, has made the festive top 20 every year for the last eight years.
Martin Talbot, managing director of the Official Charts Company, said: "It is apt that, in the year of its 25th anniversary, Fairytale Of New York has entered into the pantheon of the UK's all-time favourite singles to become the latest - and 126th - million-selling single in the history of the British charts.
"It has been a festive favourite ever since it was first released in 1987, so it is great that it can now claim this new honour."
Fairytale Of New York, which was re-released this year to celebrate its 25th anniversary, has never made it to number one in the charts.
Fifty of the 126 million-sellers have made it to the milestone in the last 10 years thanks to the advent of digital downloading of music, the OCC said.