The UN General Assembly on Thursday overwhelmingly voted to make Palestine a non-member state, in the face of strong opposition from Israel and the US.
The victory for president Mahmud Abbas triggered scenes of joy in the occupied West Bank, where thousands celebrated with bursts of gunfire and cheers in the city of Ramallah.
Abbas claimed what he called a UN "birth certificate" for a Palestinian state and got the backing of 138 countries in the 193-member assembly. Nine voted against and 41 abstained, while five did not participate.
The limited diplomatic upgrade came on the 65th anniversary of the UN partition vote, when the world body first divided the Holy Land between Jews and Arabs, who have battled over it ever since, most recently in this month's deadly Gaza fighting.
Apart from Israel and the US, those voting against were Canada, the Czech Republic, the Marshall Islands, Micronesia, Nauru, Palau and Panama.
European countries such as France, Italy, Spain, Norway, Denmark and Switzerland all voted yes. Britain and Germany both abstained, with Britain saying Abbas had failed to promise he would resume peace negotiations with Israel.
A Palestinian flag was unfurled in the General Assembly as the victory was pronounced.
The vote lifts the Palestinian Authority from an observer entity to a "non-member observer state" on a par with the Vatican.
Palestine has no vote in the General Assembly but can now join UN agencies and potentially the International Criminal Court (ICC), where it could ask for a probe of Israeli actions, including during the recent fighting in Gaza.
Abbas said he hoped to use the status upgrade as a launchpad for renewed direct talks with Israel -- frozen for more than two years -- calling the resolution "the last chance to save the two-state solution."
The Palestinian leader, however, did not make any reference to the possibility of joining the International Criminal Court -- a major worry for Israel, which fears a possible investigation.
Palestinian envoys have said Abbas will not rush to join the court but could use it as leverage if Israel does not change its policies on settlements and other matters.
The United States and Israel immediately condemned the vote, which US Secretary of State Hillary Clinton called "counterproductive."
US Ambassador Susan Rice sternly told the General Assembly that the resolution would be "an obstacle to peace" because it would not lead to a return to direct talks between the Israelis and Palestinians.
"Today's grand pronouncements will soon fade. And the Palestinian people will wake up tomorrow and find that little about their lives has changed, save that the prospects of a durable peace have only receded," she said.
Netanyahu slammed Abbas's address. "The world watched a defamatory and venomous speech that was full of mendacious propaganda," his office said.
With this major diplomatic victory, the Palestinians still face an uncertain future. For Palestinians, the idea of an independent state bears little reality on the ground, given the degree of Israeli involvement in the West Bank and Gaza.
The Palestinian Authority and UN agencies that accept Palestinian participation could also lose hundreds of millions of dollars in financing because of the vote.