Hana Khatib, an attorney from the northern town of Tamra, was selected by an Israeli justice committee alongside three men to become a religious judge, or qadi, in the courts ruling on personal law for Muslims inside Israel.
Justice Minister Ayelet Shaked, from the far-right Jewish Home party and head of the committee that selected Khatib, said the appointment of a female religious judge "should have happened a long time ago."
"This is great news for Arab women and the Arab society," she said in a statement.
"I'm excited over the choice, and hope this is the bellwether for further appointments of women."
Aida Touma-Sliman, a female Arab lawmaker from the Joint List coalition, called Khatib's appointment "a historic move" that was the result of a long legal struggle, adding it would benefit all Arabs in Israel.
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"It's time to believe in the power of Arab women in filling any role, making decisions and being in positions of influence in society and state, and removing the obstacles from the way," she said in a statement.
In Israel, family law -- divorce, marriage, endowments -- falls under the jurisdiction of religious courts, and separate systems exist for the country's different creeds.
Khatib is the first woman not only for the Muslim sharia courts but for all the religious courts in Israel, as no women serve as judges in the Jewish or Druze courts.
There are not many women qadis around the world. Two women serve as sharia judges in the neighbouring Palestinian Authority.
Khatib will be sworn in by Israeli President Reuven Rivlin in a few weeks.
There are nine regional sharia courts in Israel as well as an appeal courts, with today's appointments bringing the number of qadis in the Muslim system to 18.