Social Democrat leader Stefan Loefven -- who won last month's general election -- said the Nordic country wanted to bolster a two-state solution to the Israeli-Palestinian conflict.
Washington reacted quickly calling Stockholm's recognition "premature", while Palestinians cheered the decision as "courageous" and urged the rest of the European Union to follow suit.
"A two-state solution requires mutual recognition and the will to co-exist peacefully," Loefven said in his inaugural address to parliament.
This should take place with respect for the "legitimate demands of the Palestinians and the Israelis as regards their right to self-determination and security", he added.
Seven EU members in eastern European and the Mediterranean have already recognised a Palestinian state, namely Bulgaria, Cyprus, the Czech Republic, Hungary, Malta, Poland and Romania. Non-EU member Iceland is the only other western European nation to have done so.
But the United States cautioned against Sweden joining them.
"We believe international recognition of a Palestinian state is premature," State Department spokeswoman Jen Psaki told reporters.
"We certainly support Palestinian statehood, but it can only come through a negotiated outcome, a resolution of final status issues and mutual recognitions by both parties."
Israelis and the Palestinians, Psaki said, must be the ones "to agree on the terms on how they live in the future two states, living side-by-side."
Sweden's new foreign minister Margot Wallstroem told public broadcaster SR that Sweden was "in good company since 130 countries in the world have already done the same".
- 'An important signal' -
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At least 112 countries have recognised a Palestinian state, according to an AFP count, although a Palestinian estimate puts the number at 134.
Wallstroem said that a recognition would be "an important signal facilitating... a two-state solution".
Senior Palestinian negotiator Saeb Erakat said the rest of the EU should follow Sweden's example.
"We hope that all countries of the European Union will take the same courageous and remarkable decision... as there is no reason not to recognise the Palestinian state," he said in the West Bank capital of Ramallah.
Loefven's Social Democratic-Green Party coalition -- which formed a minority government on Friday -- is more supportive of demands for a Palestinian state than Sweden's previous centre-right administration.
The Social Democrats, the largest party in the Swedish parliament, wrote in their election manifesto that "Israel's war crimes must be investigated and the occupation of Gaza lifted".
The party added that "Sweden and the rest of the world must actively support its (Palestine's) work towards reconciliation".
The prime minister did not specify whether the policy would be put to a vote in parliament.
Sweden's foreign ministry declined to comment when asked by AFP if parliamentary approval was necessary.
The Palestinian envoy to Sweden, Hala Husni Fariz, said in a statement that the decision "reflects the historical support of the Swedish government for freedom, dignity and human rights".
Sweden voted in favour of Palestinian observer status at the United Nations in 2012, which was granted despite opposition from the United States and other countries.
The Swedish announcement coincided with the start of the Jewish holiday of Yom Kippur, the "Day of Atonement", and an Israeli government spokesman was not immediately available for comment.