The UN General Assembly has voted overwhelmingly in favour of upgrading the Palestinians' status to a non-member observer state, defying the wishes of Israel and the US.
It marks a major diplomatic triumph for Palestinian Authority President Mahmoud Abbas, who had met fierce opposition from the US and Israel over the vote.
The resolution was approved by a vote of 138-9, with 41 abstentions. It gives the Palestinian Authority the same status as the Vatican and enables it to join UN agencies, sign international treaties and access bodies such as the International Criminal Court (ICC).
A Palestinian flag was quickly unfurled on the floor of the General Assembly, behind the Palestinian delegation.
Thousands of Palestinians who had gathered in the West Bank city of Ramallah celebrated the news by firing shots into the air, embracing each other and chanting "God is greatest".
In his speech to the General Assembly before the vote, Mr Abbas said the assembly was "being asked ... to issue the birth certificate of Palestine".
His speech angered the Israeli Prime Minister Benjamin Netanyahu.
"The world watched a defamatory and venomous speech that was full of mendacious propaganda against the IDF (army) and the citizens of Israel," he said in a statement.
Mr Netanyahu said the UN move violated past agreements between Israel and the Palestinians and that Israel would act accordingly, without elaborating what steps it might take.
US Secretary of State Hillary Clinton dubbed the vote as "unfortunate and counterproductive", saying it would "place further obstacles in the path to peace".
She said: "Only through direct negotiations between the parties can the Palestinians and Israelis achieve the peace that both deserve: two states for two people, with a sovereign, viable and independent Palestine living side-by-side in peace and security with a Jewish and democratic Israel."
The UK abstained in the vote after Foreign Secretary William Hague said he could only back the move if the Palestinians gave a commitment to an immediate and unconditional return to the negotiating table with Israel.
He said he respected the decision but added: "We continue to believe that the prospects for a swift return to negotiations on a two state solution - the only way to create a Palestinian state on the ground - would be greater ... if President (Mahmoud) Abbas had been able to give the assurances we suggested, and without which we were unable to vote in favour of the resolution."
The vote had been certain to succeed, with most of the member states sympathetic to the Palestinians.
Several key countries, including France, this week announced they would support the move to elevate the status of the Palestinians.
Some countries fear the Palestinians' new access to the ICC could become a springboard for pursuing Israel for alleged war crimes or its ongoing settlement building on war-won land.