The UN General Assembly overwhelmingly voted to make Palestine a non-member state, inflicting a major diplomatic defeat on the United States and Israel.
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.
A Palestinian flag was unfurled in the General Assembly as the victory was pronounced. But Israeli Prime Minister Benjamin Netanyahu condemned what he called a "venomous" speech by the Palestinian leader.
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."
In a 22-minute speech laced with references to Israel's battle with Gaza's Hamas rulers this month, Abbas said time for an accord is running out. "The rope of patience is shortening and hope is withering."
Afterwards, he said the vote had been "historic."
"Tomorrow we begin the real war," Abbas said at a celebration reception. "We have a long road and difficult road ahead of us. I don't want to spoil our victory tonight, but the road ahead is still difficult."
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.
The United States blocked a Palestinian application for full UN membership -- made by Abbas in September 2011 -- at the Security Council.
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Netanyahu slammed Abbas's address. "The world watched a defamatory and venomous speech that was full of mendacious propaganda," his office said.
Israeli UN Ambassador Ron Prosor said recognizing Palestine "will place further obstacles and preconditions to negotiations and peace," and could even lead to further violence.
UN leader Ban Ki-moon had earlier warned Abbas that the Middle East peace process is on "life support" and that both Netanyahu and Abbas must take action to revive talks.
The Palestinian leader did not make any reference to the possibility of joining the International Criminal Court -- a major worry for Israel, which fears a possible investigation.
But Abbas said: "We will act responsibly and positively in our next steps, and we will work to strengthen cooperation with the countries and peoples of the world for the sake of a just peace."
The vote could give a boost to Abbas who faces a mounting challenge from Hamas after the Israeli offensive on Gaza, diplomats said.
Hamas welcomed the vote, calling it a "victory."
"This is a new victory on the road to the liberation of Palestine and return and we congratulate ourselves," senior Hamas official Ahmed Yussef told AFP.
But Britain and Germany, which abstained, believe the Palestinians should have waited until after US President Barack Obama installed his new administration and Israel held elections before making their UN bid.
France voted in favor of the resolution. "The Palestinian step comes at a difficult moment and there could be heavy repercussions," said French ambassador Gerard Araud.
He called on both sides to respond through the resumption of talks "and not through reprisals, which will only play the game of the extremists."
Panama, one of just nine countries to vote against the resolution, said in a statement that Palestine had the right to recognition as a state but "must first resolve its differences with its neighbor, the state of Israel."
The Palestinians still face an uncertain future on the diplomatic stage. Despite their greater access to the UN system, it is unclear whether they will be able to automatically join the ICC.
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 Palestinian Authority and UN agencies that accept Palestinian participation could also lose hundreds of millions of dollars in financing because of the vote.
Washington has warned Abbas he risks losing around $200 million in aid, which is blocked in the US Congress.