Stefan Lofven, prime minister of Sweden's newly elected, centre-left government said the conflict between Israel and Palestine demands a "two state solution."
"A two-state solution requires mutual recognition and a will to peaceful co-existence. Sweden will therefore recognise the state of Palestine," Mr Lofven said on Friday, without giving a timeline for the recognition.
Sweden will join more than 130 other countries that recognise a Palestinian state.
Most of the EU's 28 member states have refrained from recognising Palestinian statehood and those that do - such as Hungary, Poland and Slovakia - did so before joining the bloc.The Palestinians have long sought to establish an independent, sovereign state in the West Bank, including East Jerusalem as its capital, and the Gaza Strip - occupied by Israel during the 1967 Six Day War.
Correspondents say Sweden's move is likely to be strongly criticised by Israel and the US, who argue that an independent Palestinian state should only emerge through negotiations.