Iceland formally recognised Palestine as a state on Thursday during a ceremony in Reykjavik that came just two days after the Palestinian flag was raised at UNESCO in Paris.

"This is the day I formally submit to you the declaration of Palestine independence in accordance with the will of the Icelandic parliament," Icelandic Foreign Minister Oessur Skarphedinsson said, addressing his Palestinian counterpart Riad Malki at a news conference.

Malki hailed the decision.

"It's significant because (Iceland) belongs to Europe and it's very important that this might create a very positive atmosphere for others to follow suit," he told AFP.

Skarphedinsson later issued a statement stating that Iceland recognised Palestine as "an independent and sovereign state within the pre-1967 Six Day War borders."

The statement also said according to Malki Iceland's decision means "Palestine is now recognised for the first time by a country in western and northern Europe."

The two leaders also announced the establishment of diplomatic relations between the Nordic island nation and the Palestinians.

"There will be an ambassador from Iceland that will present his credentials to the Palestinians, a non-resident, and ... we are contemplating the possibility of appointing an honorary consul, an Icelander, here for the time being," Malki said.

Thursday's ceremony at the Reykjavik Culture House follows two years of preparations and a vote in the Icelandic parliament, or Allthingi, on November 29 in favour of recognising the Palestinian state on the borders that existed before the 1967 Middle East war.

It also comes two days after the Palestinian flag was raised for the first time above a United Nations agency, flying over the UNESCO headquarters in Paris as Palestinian president Mahmud Abbas attended a ceremony marking his people's historic admission to the education, science and culture body.

Admission to UNESCO has however had no impact on the Palestinians' bid for full UN membership. They would need nine votes out of 15 in the Security Council, but the United States has made clear that it would veto the bid if needed.

"It was quite important for them at this point in time," Skarphedinsson told AFP.

"They have had setbacks in the Security Council and that is why we thought it would be right not to wait, but to go ahead now and I hope it will put some wind in their sails," he added, pointing out that "it is very symbolic for them that a Western European nation, which is also in NATO, should at this moment step forward and recognise the sovereignty of Palestine."

"The timing was perfect," Malki agreed, pointing out that "it comes after a dry season" in terms of new recognitions of the Palestinian state.

More than 100 countries around the world have recognised the Palestinian state, according to the Palestinian officials.

Within the European Union, of which Iceland is not yet a member, the Czech Republic, Poland, Hungary and Malta have officially recognised Palestine.

Asked whether the latest recognition could help move the Middle East peace process forward, Malki said: "I hope so."

While stressing that "for the time being there is no peace process," the Palestinian foreign minister said he hoped the recognition would help put pressure on Israel to "rethink again how to approach the peace process in a very positive manner this time."

Skarphedinsson meanwhile said he was sure Iceland's decision carried weight.

"I noted that Iceland's vote and Iceland's determination on Palestine's admittance to UNESCO mattered in a few places, so I'd like to hope that this will help," he told AFP.