The United Nations has voted in favour of upgrading the status of Palestine from entity to non member state in spite of opposition from the US and Israel.
Celebrations could be seen on the streets of Ramallah on the West Bank ahead of the vote, with the crowd erupting in cheers as the enhanced status was announced.
Palestinian President Mahmoud Abbas described the bid as the "last chance to save the two-state solution" with Israel.
Israel's ambassador to the UN, Ron Prosor said: "No decision by the UN can break the 4,000-year-old bond between the people of Israel and the land of Israel," according to the BBC.
The overwhelming victory is more than symbolically important for the Palestinians.
For Abbas, the UN bid is crucial to maintain support and relevance of the Palestinian authority, and would give them legitimacy over their militant rivals in Gaza, Hamas.
It also allows Palestine to join UN bodies, including the International Criminal Court. There are concerns that Palestine might use their enhanced status to pursue Israel for alleged war crimes, pushing back the peace process.
The UN's recognition of Palestine as a state is not the same as creation of a state and the vote does not mean Palestine is a full member of the UN.
UN Ambassador to the US Susan Rice has said the resolution does not establish Palestine is a state, and that Palestinians "will wake up to find little has changed."
Britain abstained in the vote which saw 138 support the bid for statehood, nine oppose and 41 abstain. Shadow Foreign Secretary Douglas Alexander criticised the government's decision to abstain.
UN Secretary General Ban Ki-Moon said in a statement Thursday: "The goal remains realizing the just and lasting peace for which generations of Palestinians and Israelis have been longing - a peace that will end the occupation that started in 1967, end the conflict and ensure that an independent, viable and sovereign State of Palestine lives side by side with a secure State of Israel.
"I call on Israeli and Palestinian leaders to show vision and determination. I also urge the international community to help them forge a credible political path that will meet the legitimate aspirations of both sides"