The historic vote was 138-9, with 41 countries abstaining. The decision was greeted with cheers in the West Bank city of Ramallah, with hundreds chanting "God is great." It was a long-sought victory for the Palestinians.
A Palestinian flag was quickly unfurled on the floor of the General Assembly behind the Palestinian delegation.
The action elevates the Palestinian's status from "entity" to "nonmember observer state." Palestine will now become a party to the International Criminal Court, which means they can bring cases against Israel.
But real independence remains an elusive dream until the Palestinians negotiate a peace deal with the Israelis, who warned that the General Assembly action will only delay a lasting solution. Israel still controls the West Bank, east Jerusalem and access to Gaza, and it accused the Palestinians of bypassing negotiations with the campaign to upgrade their U.N. status.
The U.S. immediately criticized the vote, saying that it was purely symbolic and would change nothing on the ground.
"Today's unfortunate and counterproductive resolution places further obstacles in the path peace," U.N. Ambassador Susan Rice said.
U.S. Secretary of State Hillary Rodham Clinton called the vote "unfortunate" and "counterproductive," while Israeli Prime Minister Benjamin Netanyahu said the U.N. move violated past agreements between Israel and the Palestinians. He said Israel would act accordingly, but did not elaborate what steps it might take.
After the vote, U.N. Secretary-General Ban Ki-Moon urged leaders from Israel and Palestine to resume peace talks.
"Today's vote underscores the urgency of the resumption of negotiations," he said.
The United States and Israel voted against recognition, joined by Canada, the Czech Republic, the Marshall Islands, Micronesia, Nauru, Palau and Panama.
The Associated Press contributed to this report.