Speaking at a press conference, Margot Wallström said:
"We are not picking sides. We're choosing the side of the peace process".
"The government believes that the international law criteria for the recognition of the State of Palestine has been met. There is a territory, there is a population and there is a government".
The UN General Assembly approved the recognition of Palestine as a sovereign state in 2012, but the European Union and most western countries do not refer to Palestine as a separate state.
Wallström pre-empted her announcement in a debate article in the Dagens Nyheter newspaper published on Thursday morning.
"It's an important step. Some will say that the decision came too early. I'm afraid that it came too late," she wrote, adding that she "hopes that this will show the way for others."
"The aim of Sweden's recognition is to help reach the goal of Israel and Palestine co-existing side by side in peace."
The Govt will decide today to recognise the State of Palestine. Important step confirming right of Palestinian people to self-determination.— Margot Wallström (@margotwallstrom) October 30, 2014
Sweden's new Foreign Minister Margot Wallström. Photo: TT
Palestinian president Mahmud Abbas hailed the decision, his spokesman said.
"President Abbas welcomes Sweden's decision," Nabil Abu Rudeina told AFP, adding that the Palestinian leader described the move as "brave and historic".
"All countries of the world that are still hesitant to recognise our right to an independent Palestinian state based on 1967 borders, with east Jerusalem as its capital, (should) follow Sweden's lead," his spokesman quoted him as saying.
Palestinian President Mahmud Abbas, seen here voting in a municipal election. Photo: TT
Abu Rudeina said the decision was a positive step following months of soaring tensions in occupied east Jerusalem, where Palestinians have clashed almost daily with Israeli police and where Israel has recently pushed ahead with plans to build another 3,600 settler homes, drawing international condemnation.
"This decision comes as a response to Israeli measures in Jerusalem," he said.
Sweden's decision was initially announced by new Social Democrat Prime Minister Stefan Löfven as he revealed his new centre-left cabinet in early October. But has been met with strong criticism from Israel.
Sweden's Prime Minister Stefan Löfven. Photo: TT
On Thursday Israel's top diplomat said the Swedish government's recognition of a Palestinian state was "deplorable" and could undermine efforts to resolve the conflict.
"The decision of the Swedish government to recognise a Palestinian state is a deplorable decision which only strengthens extremist elements and Palestinian rejectionism," Foreign Minister Avigdor Lieberman said in a statement.
"It is a shame that the Swedish government chose to take this declarative step which causes a lot of harm and offers no advantage," he said.
"The Swedish government must understand that relations in the Middle East are a lot more complex than the self-assembly furniture of IKEA and that they have to act with responsibility and sensitivity."
Children in Gaza last month. Photo: TT
There has been intense fighting between Israel and Palestinian militants in the Gaza Strip in recent months, with some of the deadliest violence in years. But there is currently a ceasefire between the two sides.
Seven EU members have already recognized a Palestinian state -- 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.
Palestinian groups in Sweden have welcomed the decision. Earlier this month, Nael Touqan, Chairman of Palestinian Association of Stockholm told The Local:
"Sweden has great respect in Europe so we hope this means that other nations will follow its lead," he added. "This is the only way to pressure Israel".
But observers said it was too early to tell if the Swedish step would prompt other countries to make similar moves.
"It's really hard to say how many countries will actually take the plunge and follow Sweden," said Michael Schulz, an expert on the Middle East and conflict issues at the University of Gothenburg told AFP.
"For the EU to recognise Palestine, that would require all member states to agree, so it's unlikely," he said, estimating that Stockholm's decision "shouldn't change much" over the short term.
"We must see how Israel will react if they will continue their policy of settlement or if they will instead be more cautious."
Sweden's government has said it will increase bilateral aid to the middle east over the next five years.