Australia will recognise a Palestinian state at the UN General Assembly in September, Prime Minister Anthony Albanese said.
"Until Israeli and Palestinian statehood is permanent, peace can only be temporary," he told reporters.
"Australia will recognise the right of the Palestinian people to a state of their own," he added.
Several countries, including France, Britain and Canada, have announced plans to recognise statehood for Palestinians since Israel launched a bombardment of Gaza nearly two years ago in response to Hamas attacks.
Watch: 'Australia will recognise the right of the Palestinian people to a state of their own'
Mr Albanese, who made the announcement following a cabinet meeting, said recognition will be predicated on commitments Australia received from the Palestinian Authority, including that Hamas would have no involvement in any future state.
"A two-state solution is humanity's best hope to break the cycle of violence in the Middle East and to bring an end to the conflict, suffering and starvation in Gaza," Mr Albanese said at a news conference.
"There is a moment of opportunity here, and Australia will work with the international community to seize it," he added.
Read more: Which UN members recognise Palestinian statehood?
It comes as New Zealand is considering recognition of a Palestinian state, Foreign Minister Winston Peters said.
Prime Minister Christopher Luxon's cabinet would make a formal decision in September and present the government's approach at the UN Leaders' Week, he said.
Mr Peters said that while some of New Zealand's close partners had opted to recognise a Palestinian state, New Zealand had an independent foreign policy.
"We intend to weigh up the issue carefully and then act according to New Zealand's principles, values and national interest," Mr Peters said in a statement.
The government needed to weigh up whether sufficient progress was being made towards the Palestinian territories becoming a viable and legitimate state for New Zealand to grant recognition.
