The Medical Research Council (MRC) study, published in the Lancet, found rates of the disease among over 65s in the UK were 24% lower in 2011 than predicted.
Experts welcomed the fall but warned the government against cutting funding for dementia services.
Researchers assessed the lifestyles and health of 7,635 people aged over 65 for the MRC-funded Cognitive Function and Ageing Studies I (CFAS I) project between 1989 and 1994. A total of 1,457 participants were then checked for signs of dementia.
A second project, CFAS II, repeated these assessments in 7,796 patients in 2008-11.
Based on figures for 1989-94, researchers predicted that 8.3% of people over 65 would have dementia in 2011, or 884,000 people across the UK.
However, actual figures from CFAS II showed the prevalence was just 6.5%, or 670,000 people.
The finding means 214,000 fewer people in the UK have dementia than was expected, equivalent to a 24% fall.
Lead author Professor Carol Brayne of the University of Cambridge said: 'This study provides compelling evidence of a reduction in the prevalence of dementia in the older population over two decades.
'Whether or not these gains for the current older population will be borne out in future generations would seem to depend on whether further improvements in primary prevention and effective health care for conditions which increase dementia risk can be achieved.'
Alison Cook, director of external affairs at the Alzheimer’s Society, said better heart health and education may have reduced prevalence. 'While this is good news, this is one study which needs careful examination and may not indicate a continuing trend. For example, we also know that other risk factors such as obesity are in fact increasing.'
She added: ‘Dementia remains the biggest health and social care challenge facing the UK. Today’s research doesn’t mean we can take our eye off the ball.'