The Holy See has formulated its first treaty which recognises the State of Palestine, in an agreement dealing with Catholic activities in areas controlled by the Palestinian Authority.
A joint statement released by the Vatican on Wednesday said the text of the treaty had been concluded and would be officially signed by the respective authorities "in the near future".
The agreement "aims to enhance the life and activities of the Catholic Church and its recognition at the judicial level", said Monsignor Antoine Camilleri, the Vatican's deputy foreign minister who led its delegation in the talks.
Officials said this was not the first time the Vatican has recognised Palestine.
"We have recognised the State of Palestine ever since it was given recognition by the United Nations and it is already listed as the State of Palestine in our official yearbook," Father Federico Lombardi, Vatican spokesperson, said.
In an interview with the Vatican's official newspaper L'Osservatore Romano , Mr Camilleri said he hoped the agreement would indirectly help Palestine in its relations with Israel.
"It would be positive if the accord could in some way help with the establishment and recognition of an independent, sovereign and democratic State of Palestine which lives in peace and security with Israel and its neighbours," he said.
PLO executive committee member Hanan Ashrawi welcomed the Vatican's recognition of Palestine.
"The significance of this recognition goes beyond the political and legal into the symbolic and moral domains and sends a message to all people of conscience that the Palestinian people deserve the right to self-determination, formal recognition, freedom and statehood," Mr Ashrawi said in a statement.