Levy, a journalist at the left-leaning Israeli daily Haaretz, and Raheb, a preacher and pastor in the Lutheran church in Bethlehem, were honoured for their "courageous and indefatigable fight against occupation and violence, and for a future Middle East characterised by peaceful coexistence and equality for all," the Olof Palme Memorial Fund said in a statement.
"They both give a ray of hope to a conflict that has plagued and continues to plague millions of people and to endanger world peace," it said.
A controversial figure for the Palestinian cause in his country, Levy has published articles opposing the Israeli army's operations in Gaza in December 2008-January 2009 and in July-August 2014.
For more than 25 years he has written a column, entitled "Twilight Zone", on the hardships of life in the West Bank and Gaza Strip.
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Levy, who won the Euro-Med journalism prize in 2008, is a "true patriot (who) has made reconciliation with the Palestinian people the mission of his life," the jury said.
Raheb is a renowned theologist and author, a pastor of the Evangelical Lutheran Church in Jordan who has worked to further inter-religious respect and understanding, particularly among youths.
The Olof Palme Prize is an annual prize worth $75,000 (69,000 euros) awarded by the Swedish labour movement.
It commemorates the memory of the Nordic country's Social Democratic prime minister Olof Palme, an outspoken international human rights advocate who was assassinated in the Swedish capital in 1986.
Since 1987 the award has honoured human rights defenders around the world including Burma's Aung San Suu Kyi and former UN Secretary General Kofi Annan.