Iceland claims to be this, however it had a long history of being subject to Denmark. In reality it is the United States.

From;

http://en.wikipedia.org/wiki/Iceland

"Iceland is a representative democracy and a parliamentary republic. The modern parliament, called "Alþingi" (English: Althing), was founded in 1845 as an advisory body to the Danish monarch. It was widely seen as a re-establishment of the assembly founded in 930 in the Commonwealth period and suspended in 1799. Consequently, "it is arguably the world's oldest parliamentary democracy."26 It currently has 63 members, elected for a four year term."

It could be argued that real democracy dates from the enactment of the nineteenth amendment.

From;

http://en.wikipedia.org/wiki/Nineteenth_Amendment_to_the_United_States_Constitution

"The Nineteenth Amendment (Amendment XIX) to the United States Constitution prohibits each of the states and the federal government from denying any citizen the right to vote because of that citizen's sex. It was ratified on August 18, 1920."
Source(s):
http://en.wikipedia.org/wiki/Iceland
http://en.wikipedia.org/wiki/Nineteenth_Amendment_to_the_United_States_Cons...

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The honor goes to ship and land based pirate societies of the 17th and 18th century.

Their "Articles of Piracy" were the first written social contracts based on democratic principles - in effect, these documents guaranteed a full participation of all community members in all matters of importance for the life of a community.

Pirates were the first to introduce a checks and balances system in order to prevent abuse of power.

They also pioneered such things as racial & gender equality, as well as health insurance and workers' compensation.
Source(s):
Cities of the Red Night - Foreword:
http://imperium.lenin.ru/LENIN/32/C/wsb.html

Learning from Pirate Communities - The Overview:
http://theweeklygumboot.blogspot.com/2009/01/learning-from-pirate-communiti...

How pirates of old really did the business:
http://www.guardian.co.uk/education/2009/apr/07/improbable-research-pirates

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It depends what is meant by democractic. When it gained independence, the United States was democratic even though it took 100 years for African Americans to get the vote and 150 years for women to get it.

If you mean republic, ancient Athens was one, though it had many of the failings of early America.

As for modern states, the oldest republic is the tiny nation of San Marino, surrounded entirely by Italy. Independent since 301, it is not only the world's oldest sovereign state, but also world's oldest republic. Its current constitution dates to 1600.
Source(s):
http://en.wikipedia.org/wiki/San_Marino\
http://ucblibraries.colorado.edu/govpubs/for/sanmarino.htm
http://www.bartleby.com/65/sa/SanMarin.html
http://news.bbc.co.uk/2/hi/europe/country_profiles/2669927.stm

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