Actresses including Meryl Streep, Sally Field, Sandra Bullock and Cameron Diaz saluted the 76-year-old Oscar-winner at Thursday's event in Hollywood.
"I'm so happy to add another woman's name to the list," she said.
Fonda's brother, Easy Rider star Peter Fonda, said "Jane, I've never been prouder of you, and I know Dad is too."
Their late father, actor Henry Fonda, was an Oscar-winner aged 76 for the 1981 film On Golden Pond and received the AFI award in 1978.
Presenting the honour to Jane Fonda, actor Michael Douglas said: "Jane, you are true film royalty, not through birth, but through your talent."
Fonda, nominated for seven Academy awards, has won two Oscars for 1971's Klute and 1978's Coming Home.
Fellow Oscar-winner Meryl Streep, who made her film debut opposite Fonda in 1977's Julia, said of her initial meeting with the star: "She had an almost feral alertness, like this bright blue attentiveness to everything around her.
Sally Field added: "She brought this new kind of raw sexuality, of gritty innocent honesty, vulnerable to the core - and I had never seen anything like it."
There were moments of lightness during the ceremony at the Dolby Theatre, as actor Jeff Daniels, one of Fonda co-stars in the HBO series The Newsroom, sang a tribute to the actress, offering lyrics about her "abs, buns and thighs" as one of her exercise videos played on a screen behind him.
And comic actress Wanda Sykes took the stage dress in a silver parody of the outfit worn by Fonda in her 1968 film Barbarella, directed by her then-husband Roger Vadim.
As she accepted the award, Fonda offered some advice on career longevity for the roomful of celebrities gathered: "Ask questions, stay curious. It's much more important to be interested than to be interesting."
A cast of stars have paid tribute to actress and political activist Jane Fonda as she accepted the American Film Institute's Life Achievement Award.