The United Nations General Assembly has voted by a more than two-thirds majority to recognise the state of Palestine.
The resolution has upgraded the Palestinians' status to a non-member observer state at the United Nations.
It was approved by the 193-member world body late today by a vote of 138-9 with 41 abstentions.
Fireworks were set off and people danced in the street after the vote gave de facto recognition of the Palestinian state.
In Bethlehem, the bells of the Church of the Nativity peeled in honour of the vote.
Thousands of people crowded around to watch a live broadcast on the street.
Earlier the Palestinian President Mahmoud Abbas told the UNGA before the key vote that it "is being asked today to issue the birth certificate of Palestine."
Israel and the US warned it could delay hopes of achieving an independent Palestinian state through peace talks with Israel.
President Abbas said the vote was the last chance to save the two-state solution.
Israeli Prime Minister Benjamin Netanyahu condemned the Palestinian President Mahmoud Abbas's strong critique of Israel in the UN address.
Mr Netanyahu said that Mr Abbas's speech was "hostile and poisonous", and full of "false propaganda".
He said; "These are not the words of a man who wants peace,"
Several key countries, including France, recently announced they would support the move to elevate the Palestinians from the status of UN observer to nonmember observer state.
Palestinians say the successful vote will strengthen their hand in future talks with Israel, which has lambasted the recognition bid as an attempt to bypass such negotiations..
The vote will put Palestine on equal footing with Israel, meaning future talks would be conducted between two states, rather than between a military occupier and a people under occupation.
The vote grants Mr Abbas an overwhelming international endorsement for his key position, an establishment of a Palestinian state in the West Bank, Gaza Strip and east Jerusalem, the territories captured by Israel in the 1967 Mideast war.
Israeli leader Benjamin Netanyahu is opposed to a pullback to the 1967 lines, this should strengthen Mr Abbas' hand if peace talks resume.
The UN vote may help Mr Abbas restore some of his standing, which has been eroded by years of standstill in peace efforts.
His rival, Hamas, deeply entrenched in Gaza, has seen its popularity rise after an Israeli offensive on targets linked to the Islamic militant group there earlier this month.
At least 15 European states, including Ireland voted for it.
US Secretary of State Hillary Clinton criticised the UN General Assembly's vote calling it an "unfortunate and counterproductive" move that places more obstacles in the path to peace.
She said: "We have been clear that only through direct negotiations between the parties can the Palestinians and Israelis achieve the peace they both deserve: two states for two people with a sovereign, viable independent Palestine living side by side in peace and security with a Jewish and democratic Israel," Clinton said in a speech in Washington on foreign policy trends.
Peace talks have been stalled for two years, mainly over Israeli settlements in the West Bank, which have expanded despite being deemed illegal by most of the world.
There are 4.3 million Palestinians in the West Bank and Gaza.
In the draft resolution, the Palestinians have pledged to relaunch the peace process immediately following the UN vote.
The Palestinian Authority has been concentrating its efforts on lobbying wealthy European states, diplomats say.
Austria, Denmark, Norway, Finland, France, Greece, Iceland, Ireland, Italy, Luxembourg, Malta, Portugal, Spain, Sweden and Switzerland all pledged to support the resolution.
Britain said it was prepared to vote yes, but only if the Palestinians fulfilled certain conditions.
The fiercely pro-Israel Czech Republic was planning to vote against the move, dashing European hopes of avoiding a three-way split in the continent's vote.
It was unclear whether some of the many undecided Europeans would join the Czechs. Germany, Hungary and the Netherlands plan to abstain, like Estonia and Lithuania.
Hamas militants, who control Gaza and have had icy relations with the Palestinian Authority in the West Bank, unexpectedly offered Mr Abbas their support this week.