The 5,500-year-old Neolithic axe was found during archaeological surveys ahead of a multi-billion euro tunnel project.
The axe seems to have been jammed into what was once the seabed, perhaps as part of a ritual offering.
The lack of oxygen in the clay ground helped preserve the wooden handle.
The find was made in Rodbyhavn on the Danish island of Lolland, which is to be connected to the German island of Fehmarn via the tunnel link.
"Finding a hafted [handle-bearing] axe as well preserved as this one is quite amazing," said Soren Anker Sorensen, an archaeologist at the Museum Lolland-Falster in Denmark.
Archaeologists have found other similarly well preserved organic material in the area during their excavations.
These include upright wooden stakes, a paddle, bows and other axe shafts.
Axes were vital tools for Stone Age people, who used them for working wood. However, they also played an important role during the introduction of farming to Europe, when the majority of the land was covered by dense forests.
The archaeologists suggest that the Neolithic communities of south Lolland may have been using the coast as an offering area.
Earlier this month, archaeologists working on the Fehmarn Belt Tunnel scheme announced that they had uncovered 5,000-year-old footprints along the edge of an ancient fish trap excavated at Rodbyhavn.

The party said it was aware the site had been taken over by its website host who has "turned on them", and they were unable to access it.
The site now reads: "What happened to The LabourBristol website? I think the more important question is, what happened to the Labour party?"
A party spokesman said action was being taken against the person responsible.
"The comments there do not represent the views of the Bristol Labour Party," the spokesman added.
"It's been referred to our compliance and legal team."
The attack on the hacked website goes on to say Labour Party leader Jeremy Corbyn is "ill equipped to lead the party, let alone be prime minister".
It also attacks the leaders of the Momentum group which supports Mr Corbyn.
The site's owner, Lyle Hopkins, told the BBC he had spent "lots of time and a few thousand pounds" revamping the website. and had tried unsuccessfully to get the local Labour Party to take ownership of it.
He said he had altered it because he had "lost all confidence" in Mr Corbyn and had "had enough". He claimed he had witnessed "first hand at the Bristol West labour party meeting just how unpleasant and aggressive the Momentum activists were".
"I'm no longer willing to support the party with my time and effort as long as Corbyn is leader."
Archaeologists in Denmark have uncovered an incredibly rare find: a stone age axe held within its wooden handle.
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Text on Bristol Labour Party's website has been replaced by with attack on Jeremy Corbyn and his supporters.