The UN General Assembly has voted overwhelmingly to recognise Palestine as a non-member observer state - a move strongly opposed by Israel and the US.
Palestinian President Mahmoud Abbas said this was the "last chance to save the two-state solution" with Israel.
Israel's UN envoy said the bid pushed the peace process "backwards", while the US said the move was "unfortunate".
The Palestinians can now take part in UN debates and potentially join bodies like the International Criminal Court.
The assembly voted 138-9 in favour, with 41 nations abstaining.
Hundreds of Palestinians celebrated on the streets of Ramallah, in the West Bank after the result was announced.
"Sixty-five years ago on this day, the United Nations General Assembly adopted resolution 181, which partitioned the land of historic Palestine into two states and became the birth certificate for Israel," Mr Abbas said shortly before the vote in New York.
"The General Assembly is called upon today to issue a birth certificate of the reality of the State of Palestine," he said.
But Israel's Prime Minister Benjamin Netanyahu called the vote "meaningless", and said that Mr Abbas' address in New York had not been "the words of a man who wants peace".
Opponents of the bid say a Palestinian state should emerge only out of bilateral negotiations, as set out in the 1993 Oslo peace accords under which the Palestinian Authority was established.
US Secretary of State Hillary Clinton called the vote "unfortunate and counter-productive", saying it put more obstacles on the path to peace.
UN Secretary General Ban Ki-moon also called for more talks, saying the resolution underscored the need to resume meaningful peace negotiations.
The UK abstained from the vote, as did Germany. The Czech Republic, Canada, the Marshall Islands and Panama were among the nations voting with the US and Israel.
In the West Bank, crowds celebrated the vote by waving flags and chanting "God is great!"
"For the first time, there will be a state called Palestine, with the recognition of the entire world," Amir Hamdan was quoted as saying by the Associated Press news agency.
"Today the world will hear our voice," he added.
The Palestinians are seeking UN recognition of a Palestinian state in the West Bank, Gaza and East Jerusalem, the lands Israel captured in 1967.
While the move is seen as a symbolic milestone in Palestinian ambitions for statehood, the "Yes" vote will also have a practical diplomatic effect, says the BBC's Barbara Plett, at the UN.
The Palestinians hope that access to UN bodies will bring new rights: A successful application for membership of the ICC could be used to accuse Israel of war crimes or make other legal claims against it.
"This is a whole new ball-game now. Israel will be dealing with a member of the international community, a state called Palestine with rights," senior PLO official Hanan Ashrawi told the BBC.
"We will have access to international organisations and agencies and we will take it from there."
There had been lobbying by Israel and the US to try to delay the vote or change the text to obtain guarantees that no international legal action would be taken against Israel.
Last year, Mr Abbas asked the UN Security Council to admit the Palestinians as a member state, but that was opposed by the US.
Mr Abbas was much criticised by many Palestinians for remaining on the sidelines of the conflict earlier this month in Gaza and efforts to achieve a ceasefire with Israel.
His Fatah movement, based in the West Bank, is deeply split from the militant Hamas movement which governs Gaza.
Gaza's Prime Minister Ismael Haniyeh said in a statement sent to the BBC that Hamas' "support for the UN bid is based on the 'rule of non-recognition of the occupier'... and the right of Palestinians to return to their homeland".