The Artist leads the top nominations with Best Picture, Best Actor, Best Director among others.
Scorsese's 3D adventure had won five Oscars against two for The Artist by French director Michel Hazanavicius, which has won a series of honors during Hollywood's annual awards season.
Octavia Spencer took home the prize for best supporting actress for her role as a black maid in the civil rights drama The Help, receiving a standing ovation for the also top-tipped movie.
Veteran Canadian actor Christopher Plummer crowned a six-decade acting career with a long-overdue Oscar, a best supporting actor trophy for his role in Beginners as an ailing widower who embraces his homosexuality.
Hollywood's biggest and most glittering night had long been expected to be a battle between Hugo and The Artist, two odes to film-making, and Scorsese's movie netted a string of early awards including art direction, cinematography and sound mixing.
The Artist won Oscars for costume design and best score, while several films had earned at least one Academy Award including The Iron Lady, and The Descendants starring George Clooney.
Other winners included the Johnny-Depp voiced Rango, which won the best animated feature prize, and Woody Allen, who was honored for best original screenplay for Midnight in Paris.
In the foreign language category, Iran's A Separation" beat films from Belgium, Canada, Israel and Poland as expected.
Its director Asghar Farhadi dedicated the award to Iranians "who despise hostility and resentment," and referred to current tension between Tehran and the West over the Islamic republic's suspect nuclear program.
But the bigger prizes, including the top award of the night for Best Picture, were still up for grabs as the star-studded evening moved into its second half.
Highlights of the show included a breathtaking cinema-themed performance by Canadian dance troupe Cirque du Soleil, including rapid-fire acrobatics and tumbling across the stage and ceiling of the auditorium.
"Wow," said veteran host Billy Crystal, presenting the show for the ninth time. "I pulled a hamstring just watching that."
The list of presenters was chock full of heavy-hitters -- last year's best actress and actor Natalie Portman and Colin Firth were set to join Tom Cruise, Penelope Cruz, Tom Hanks and Angelina Jolie among others.
Hugo went into the show with the most nominations, at 11, with The Artist just behind on 10.
Scorsese is not the only legendary director in the mix -- Allen is in the running for best picture honors for his comeback hit Midnight in Paris, and Steven Spielberg will gun for the top prize with War Horse.
Buddies Clooney and Brad Pitt will duke it out for best actor, but Artist star Jean Dujardin, who has won a slew of awards for his portrayal of a struggling silent-era movie star, could best them both.
Clooney downplayed his hopes of winning best actor before the show, saying: "I have a feeling in the best actor race you're going to hear someone speaking French."
Meryl Streep could take home her first Oscar in three decades for a powerful turn as former British premier Margaret Thatcher in The Iron Lady, in a battle against cross-dressing Glenn Close in Albert Nobbs.
Rooney Mara, who plays damaged hacker Lisbeth Salander in The Girl with the Dragon Tattoo is also in the running for the best actress prize, as is Michelle Williams for her turn as Marilyn Monroe in My Week with Marilyn.
But Oscar watchers say they could all be beaten by Viola Davis, whose role as a black maid in The Help -- set in Mississippi against the backdrop of the 1960s civil rights struggle -- has earned her an outpouring of praise.
The Help is also among the nine movies nominated for best picture, along with War Horse, The Artist, Moneyball, The Descendants, Midnight in Paris, Hugo and powerful 9/11 film Extremely Loud and Incredibly Close.
Also up for the top prize is Terrence Malick's The Tree of Life, which won the coveted Palme d'Or at last year's Cannes Film Festival.
The spectacle began even before the curtain went up, with the usual procession of glamour gowns on the red carpet leading into the Oscars, the climax of Hollywood's annual awards season.
British comic Sacha Baron Cohen also pulled a colorful stunt, defying a warning against coming dressed as the star of his latest movie, The Dictator -- and pouring the faux ashes of late North Korean leader Jim Kong-Il onto the red carpet.