Sweden will be the first sitting member of the European Union to recognise the state of Palestine.
Prime Minister Stefan Lofven announced the move during his inaugural speech to the new government.
"The conflict between Israel can only be solved with a two-state solution, negotiated in accordance with international law," he said.
"A two-state solution requires mutual recognition and a will to peaceful co-existence. Sweden will therefore recognise the state of Palestine."
Hungary, Poland and Slovakia also recognise the state, however this was done before they joined the EU.
The UN General Assembly granted de-facto recognition to Palestine in 2012, amid strong opposition from Israel, the US and the EU.
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