Palestinian Prime Minister Salam Fayyad welcomed the decision, saying "this is an important step en route for the international community assuming full responsibility for its role in ending the occupation of all lands seized in 1967, including east Jerusalem, thus enabling the Palestinian people to form their independent state."
The decision, he added, clears the path for the EU to join the US and play a major role in the Israeli-Palestinian peace process.
"It's time the Israeli leadership realizes there is no point in trying to go around international law and international decisions guaranteeing the Palestinian people's right to statehood. Israel is not above the law," he said.
Foreign Minister Avigdor Lieberman was also pleased by the decision: "I'm pleased that the foreign ministers didn’t make any rash, one-sided decisions.
"The decision stating the some of the core issues between Israel and the Palestinians must be settled by negotiations is even an improvement to Europe's previous stand."
A senior Foreign Ministry source told Ynet that "ensuring such a decision was made was not an easy task." The ministry, added the source, worked hard to rally the support of Italy, Germany, Hungary and other central-European countries against the Swedish initiative.
The source added that in any case, Tuesday's decision addressed the Palestinian Authority, not a Palestinian state: "One example is Article 8, which mentions Jerusalem and says that in case of durable peace, an agreement would be reached regarding Jerusalem via negotiations meant to set its status as the capital of both nations.
"Such decisions render demands like the one made in the Swedish initiative groundless," he said.
A senior source in the Prime Minister's Office said that "Israel is profoundly disappointed with Sweden's term as EU president. The Swedes have been biased… and not one Swedish delegate visited Israel during the term. Sweden acted like it was one of the participants of the Fatah convention."
"The decision made is not exactly pro-Israeli, but one can certainly say that following our (diplomatic) activity, nothing too dramatic happened. This is a classic EU position and it's not as bad as it could have been had the Swedish initiative's first draft been carried through."