Iceland has become the first west European country to formally recognise a Palestinian state, three months after the Palestinians began to seek full membership of the United Nations with peace talks with Israel frozen indefinitely.
"Iceland didn't only talk the talk, we walked the walk," Icelandic Foreign Minister Ossur Skarphedinsson said on Thursday at a news conference in Reykjavik.
"We stood by our word, we have supported the Palestinian cause and today will not be the end of that, we will continue to do so," he added.
Palestinian Foreign Minister Riyad al-Malki said: "[This] will surely have positive influence on other states to follow the same steps."
The two also announced the establishment of diplomatic relations between the Nordic island nation and the Palestinians.
"There will be an ambassador from Iceland that will present his credentials to the Palestinians, a non-resident, and ... we are contemplating the possibility of appointing an honorary consul, an Icelander, here for the time being," Malki said.
Thursday's ceremony at the Reykjavik Culture House follows two years of preparations and a vote in the Icelandic parliament, or Allthingi, on November 29 in favour of recognising the Palestinian state on the borders that existed before the 1967 Middle East war.
The move comes two days after the Palestinian flag was raised for the first time above the UNESCO headquarters in Paris to mark Palestine's admission to the education, science and culture body.
Admission to UNESCO has however had no impact on the Palestinians' bid for full UN membership. They would need nine votes out of 15 in the Security Council, but the US has made clear that it would veto the bid if needed.