Dame Vera, 99, became known as the Forces Sweetheart for entertaining the troops during World War Two.
One of her best-known songs, The White Cliffs Of Dover, featured in a list of the Queen's favourite pieces of music, released earlier this week.
Despite this, Dame Vera, who lives in Sussex, said she "never expected" this accolade and was "greatly honoured".
She has been made a Member of the Order of the Companions of Honour for services to entertainment and charity.
Dame Vera said: "I was very surprised... I felt very greatly honoured to be given a Damehood and never expected to receive anything else.
"So for Her Majesty to bestow a further accolade on me is very unexpected and I feel even more honoured."
In her 20s, Vera Lynn played a huge role in keeping British spirits up during the Blitz. She travelled thousands of miles, often at great personal risk, to entertain troops.
Her hits included We'll Meet Again, I'll Be Seeing You, Wishing and If Only I Had Wings.
In 1941, she was given a BBC radio programme, Sincerely Yours, with a peak-time evening audience.
After the war she retired from the stage to bring up her daughter, Virginia, at their home in Ditchling, Sussex, but remained in demand across the world.
Dame Vera once said: "I have never been terribly ambitious. I never wanted to be a Judy Garland.
"If work came along I liked, I would do it. If it interfered with home life for too long or took me away, I wouldn't."
Her accolades include an OBE in 1969, a DBE in 1975, and in 1978 she was given the Freedom of the City of London.

Louis Harris, 18, has been missing since he was spotted near the pavilion walking up steps towards the pier at 04:30 GMT on 14 February.
Dorset Police said it was "totally out of character" for him to disappear and they were "extremely" concerned.
A spokeswoman added that specialist dive teams have been looking in Weymouth harbour.
Mr Harris is white, about 5ft 10ins, slim, with brown short hair.
He was last seen wearing a blue and white hooded Lacoste top, a white Fat Face checked shirt with a blue and red checked pattern, blue jeans and Vans shoes.
Chief Inspector Steve Horton, of Dorset Police, said his family has not heard from him since he went missing.
Dame Vera Lynn has been recognised for services to entertainment and charity in the Queen's Birthday Honours list.
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Police divers have been searching for a missing Dorchester man who was last seen on Weymouth beach.