Bowie, who surprised fans by returning to music with his The Next Day album, has been ranked joint favourite to take the award, alongside past winners Arctic Monkeys, who are nominated for their fifth release, AM.
The 12-strong list includes seven acts who have previously featured on the shortlist since the prize was launched in 1992. Arctic Monkeys - who took the prize in 2006 - and singer-songwriter Laura Marling each make it on to the list for a third time, while Foals, James Blake and Villagers are among those who make their second appearance in the nominations list.
Bowie, who was previously up for the prize in 2002 for his album Heathen, is the oldest figure on the list and at 66 is the joint oldest nominee ever in the running. Jazz pianist Stan Tracey was the same age when he was shortlisted in 1993 for his album Portraits Plus.
Once a prolific pace-setter, Bowie had withdrawn almost entirely from the public eye in recent years and had released no albums for a decade.
But without warning earlier this year, he suddenly released a single, Where Are We Now?, and announced his comeback album which was warmly received by fans and critics, as were the accompanying videos.
There have been persistent rumours of ill-health for the New York-based British star, but these have been repeatedly denied by his representatives.
The list, which includes five debuts by the likes of 19-year-old Bugg and Disclosure, was drawn from 220 albums submitted to the judging panel. Nominees were announced at an event in London's Hospital Club. The other first-timers are Savages, Laura Mvula and Rudimental.
Inclusion on the shortlist usually ensures an instant boost in sales for nominated artists, who hope to emulate last year's winner Alt-J who triumphed with debut An Awesome Wave. Other winners over the years have included Elbow, Klaxons and two-time winner PJ Harvey.
Electronica act Jon Hopkins was previously nominated for the Mercury for his collaboration with King Creosote, called Diamond Mine, but this is his first time in his own right.
The £20,000 prize is open to British and Irish acts and aims to reward the best album of the year. It will be awarded on October 30 in a ceremony at the Roundhouse venue in London
Chairman of the judging panel Simon Frith said: "This year's Barclaycard Mercury Prize shortlist celebrates a fascinating year for British and Irish music, marked by a wonderful range of musical voices - urgent, reflective, upbeat and tender, acoustic and electronic, and all with something intriguing to say."
Bookmaker William Hill puts both Bowie and Arctic Monkeys at 4-1. Rupert Adams, spokesman for the firm, said: "On paper it looks like a straight fight between Bowie and Arctic Monkeys, but the Mercury does not do predictable and there is some good value around."
The nominated artists and albums (with William Hill odds in brackets) are:
:: Arctic Monkeys - AM (4/1)
The Sheffield quartet released their fifth album AM only this week and it is on course to go to number one at the weekend, as all its predecessors have done. The band famously created a buzz online before the release of first hit I Bet That You Look Good On The Dancefloor in 2005. This summer they previewed much of their new album - record in California - by headlining the Friday night of Glastonbury Festival. They won the Mercury in 2006 with debut Whatever People Say I Am, That's What I'm Not.
The Mercury judges said: "AM is a bold new chapter in the Arctic Monkeys' story - sonically gripping, lyrically involving and brilliantly performed."
:: David Bowie - The Next Day (4/1)
The Next Day became Bowie's 24th studio album when it was released in March of this year and broke a recording silence of a decade. After first capturing major public attention 44 years ago with his first big hit Space Oddity, the musician has often been seen as one of the most influential figures in the music world for his swiftly changing style and image. The cover of his latest album saw him work once again with producer Tony Visconti and apparently looking back at his career in a world-weary way on single Where Are We Now?
Judges said: "David Bowie celebrates his legendary songwriting ability with panache and a remarkable sense of urgency."
:: Foals - Holy Fire (5/1)
Holy Fire is the third album by the Oxford quintet and marks their second inclusion on the Mercury shortlist following Total Life Forever in 2010. The act, fronted by Yannis Philippakis, recorded it in London with renowned producers Flood and Alan Moulder, enjoying success with the single Inhaler.
Judges said: "A wonderfully dynamic album - ambitious, intelligent and rhythmically compelling."
:: Laura Marling - Once I Was an Eagle (5/1)
Marling is now four solo albums into her career at the age of just 23, and is in the running for the Mercury for a third time after having been shortlisted in 2008 and 2010. Hailing from Eversley in Hampshire, the indie-folk singer recorded the album in Bath and Wiltshire with respected producer Ethan Johns, with whom she has previously worked, and it reached number three in the chart.
Judges said: "A singer-songwriter in complete control of her craft - powerful, moving and inspiring."
:: Disclosure - Settle (7/1)
Disclosure is made up of musician brothers Howard and Guy Lawrence, aged 19 and 22 from Reigate in Surrey. The electronic duo, who have played numerous European festivals, went to number one with the release of their debut album this year. It features vocals by collaborators from solo stars such as Jessie Ware, Eliza Doolittle and Jamie Woon.
Judges said: "A joyous pop record for clubbers; an infectious dance record for pop fans."
:: James Blake - Overgrown (7/1)
Blake is a Goldsmiths College music graduate who was previously nominated for the Mercury for his self-titled debut album which he recorded at his home in New Cross, south east London. The musician, whose father was a member of the band Colosseum, produced his second album himself and it features contributions from Brian Eno and RZA from Wu-Tang Clan.
Judges said: "Late night music for the digital age. An inventive, poignant and poetic record of great beauty."
:: Jake Bugg - Jake Bugg (8/1)
The 19-year-old singer-songwriter from Nottingham released his debut in October 2012, showcasing his skills as a blues-rock performer as well as his abilities as a finger-style guitarist. He impressed further with his well-received performance at Glastonbury Festival. Singles have included Lightning Bolt.
Judges said: "Fluent, restless, acutely observed songs of teenage life in contemporary Britain."
:: Rudimental - Home (8/1)
Electronic music quartet Rudimental are based in Hackney, east London, and released their debut album in April. They have worked with guest vocalists such as John Newman and have already notched up two chart-topping singles with Feel The Love and Waiting All Night.
Judges said: "A jubilant and thrilling showcase for an audacious new British dance act."
:: Laura Mvula - Sing To The Moon (8/1)
The soul singer from Birmingham was earmarked for big things this year after being shortlisted for the Critics' Choice award at the Brits and named in the BBC's Sound of 2013 list, finishing fourth. Mvula, a graduate from the Birmingham Conservatoire, released her debut album in March 2013 and was among the performers at the BBC's Urban Prom at the Royal Albert Hall in August.
Judges said: "An album of luminous musicality - elegant vocals, subtle textures and continuous melodic intrigue."
:: Jon Hopkins - Immunity (10/1)
Immunity, his fourth solo album, was released this summer by the respected indie label Domino, although he has also been a Mercury contender in 2011 for his collaboration with prolific recording artist King Creosote for the album Diamond Mine. Hopkins is also known for his production work with Brian Eno and Coldplay.
Judges said: "An electronic world of wonder - delicate, eventful and utterly absorbing."
:: Savages - Silence Yourself (10/1)
The all-female pop-punk act - with a name inspired by literary classic Lord Of The Flies - formed two years ago and made their debut supporting British Sea Power. The London-based band released their debut album in May.
Judges said: "Art-punk for our times - intense, enthralling and formidable."
:: Villagers - Awayland (10/1)
Fronted by Dun Laoghaire-raised Conor O'Brien, Villagers released second album Awayland. The act's debut Becoming A Jackal was shortlisted in 2010 and the title track of that album was nominated for an Ivor Novello Award. O'Brien previously recorded with former band The Immediate and as a member of Cathy Davey's band.
Judges said: "Songwriting at its most wilfully romantic - imaginative, inviting and musically adventurous."