It faces competition from two grime albums - Kano's Made In The Manor and Skepta's Konnichiwa.
The records, which address everything from police harassment to broken families, both reflect an emerging maturity in the genre.
Radiohead receive a record fifth nomination for their stirring, emotional album A Moon Shaped Pool.
The band, who are currently on tour in the US, have yet to win the album of the year award.
Other artists nominated for the £25,000 prize include Laura Mvula, The 1975 and Michael Kiwanuka.
The full list of nominees is:
Read more about the nominees
Blackstar, which contains the line: "Look up here, I'm in heaven," on the track Lazarus, has been called Bowie's "parting gift".
Released just two days before his death from cancer, it went to number one on both sides of the Atlantic.
There is also a nomination for former Mercury Prize-winner Antony and the Johnsons, who now goes under the name Anohni.
Her album, Hopelessness, is a lacerating look at the modern world that rages against President Obama, drone warfare and ecological disaster.
The shortlist was chosen by a panel of judges that includes former winner Jarvis Cocker, Radio 1's Annie Mac, pop producer Naughty Boy and singer Jessie Ware.
Notable omissions include Adele's 25 and Coldplay's A Head Full Of Dreams, which were the two biggest-selling albums released during the eligibility period: 26 September 2015 to 29 July 2016.
PJ Harvey, the only artist to win the prize twice, also misses out on a nomination for her latest album, The Hope Six Demolition Project.
The shortlist will be whittled down to six albums on the night of the awards, with one of those finalists selected by a public vote.
Presented by Lauren Laverne, the ceremony will be broadcast live on BBC Four and 6 Music on 15 September.
After last year's low-key event, the award will be handed out at a gala concert in London's Eventim Apollo, after Hyundai stepped in as a headline sponsor.
After the row over diversity at this year's Brits, the Mercury list does its best to redress the balance, with an all-female rock band, two grime MCs, a music icon and a transgender torch singer.
Many of the nominated albums are unswervingly political. Anohni accuses President Obama of "executing without trial", while Skepta delivers a powerful message to the establishment: "We don't listen to no politician".
All of the records feel vital and innovative - yet it's the most commercial list in years, with all but one of the nominees having entered the UK album chart, four of them at number one.
That's thanks to a new panel of judges which puts an emphasis on musicians - including Jarvis Cocker and Naughty Boy - over rock critics and industry "suits".
They've even taken the brave decision to omit Adele's all-conquering 25. Not that she'll mind: The £25,000 prize is only just enough to buy one of her concert tickets on the secondary market.
Follow us on Twitter @BBCNewsEnts, on Instagram at bbcnewsents, or email entertainment.news@bbc.co.uk.

NHS Highland has confirmed that plans to add an extra 150 spaces at Raigmore Hospital in Inverness were in the early stages.
Parking has been a long-running issue at the hospital.
It has been claimed it is being used as an unofficial park and ride facility with people able to park there for free and then take a bus into the city.
NHS Highland said: "We have identified funding which we will use to create up to 150 extra spaces on the site and we will also be reintroducing entrance and exit barriers to the car park."
David Bowie's final album, Blackstar, has been shortlisted for the 25th annual Mercury Prize.
[NEXT_CONCEPT]
Additional car parking could be provided at the biggest hospital in the Highlands.