Russia on Saturday pulled its troops out of Lyman, which had a pre-war population of around 20,000, because Kyiv's forces had closed in and threatened to encircle them amid ongoing counter-offensives in the north and east of the country.
Videos posted online at around 11.20am on Sunday - and shared by Mr Zelensky's office - showed Ukrainian soldiers raising the country's national blue and yellow flag at the entrance to the town.
"As of 12.30pm (09.30 GMT), Lyman is fully cleared," Mr Zelensky said in a short video clip on his Telegram channel. There was no immediate comment from the Russian armed forces on the status of Lyman, captured by Kremlin forces in May.
Located about 176km (109 miles) southeast of Kharkiv, Ukraine's second-largest city, Lyman has been described by analysts as key to Moscow's war effort because it is home to a major rail junction which serves the western edge of the Donbas region, parts of which are under full Russian control.
Moscow had been using Lyman, a months-long stronghold in the north of Donetsk, as a logistics and transport hub for the front line.
Military experts said Ukraine's retaking of Lyman could pave the way for its troops to make inroads into the adjacent Luhansk province - one of four regions Russian president Vladimir Putin illegally annexed on Friday, following referendums described as “sham” by the West.
The liberation of Lyman is a major setback for Russia and a humiliating defeat for Mr Putin, who had only hours earlier declared the city part of Russia "forever".
Serhiy Gaidai, governor of the Luhansk region that neighbours Donetsk, said control over Lyman could help Ukraine reclaim lost territory in his region, whose full capture Moscow announced in early July after weeks of grinding advances.
"The liberation of this city in the Donetsk region is one of the key factors for the further de-occupation of the Luhansk region," Gaidai wrote on the Telegram messaging app on Sunday.
His comments were echoed by US defence secretary Lloyd Austin, who said the retaking of Lyman would make the war "more difficult" for Russia.
Mr Zelesnky on Saturday, meanwhile, promised more quick successes in the Donbas, which covers the Donetsk and Luhansk regions that are largely under Russian control.
"Over the past week, the number of Ukrainian flags in Donbas has increased. There will be even more a week's time," Mr Zelensky said in an evening address.
The areas Mr Putin claimed as annexed - the Donbas regions and the southern regions of Kherson and Zaporizhzhia - form a swath of territory equal to about 18 per cent of Ukraine's total surface land area.
In other developments, Russia's defence ministry said on Sunday its forces had destroyed seven artillery and missile depots in the Ukrainian regions of Kharkiv, Zaporizhzhia, Mykolaiv and Donetsk.
It said the guidance radar for a S-300 air defence missile system had also been destroyed near Nova Kaluha in the Kherson region of southern Ukraine.
It came as Pope Francis implored Mr Putin to "stop this spiral of violence and death" in Ukraine, and denounced the "absurd" risk to humanity of catastrophic nuclear war as tensions escalate.
The pontiff made his strongest plea yet on the seven-month war as he addressed the public in St Peter's Square in Vatican City. It was the first time in public that he cited Mr Putin's leadership.
He also called on Mr Zelensky to "be open" to serious peace proposals. And he exhorted the international community to "use all diplomatic instruments" to end this "huge tragedy" and "horror" of war.
"This terrible, inconceivable wound of humanity, instead of shrinking, continues to bleed even more, threatening to spread," said Francis.