Founders of the Arab Museum of Contemporary Art, a joint project in cooperation with the mayor of northern Arab-Israeli town of Sakhnin, said it aims to promote "peace and dialogue" in the troubled region.
An old Arab-style building nestled among greenery in Sakhnin in the Galilee region, which has a mixed Jewish and Arab population, houses the exhibits.
The opening exhibition, Hiwar (dialogue in Arabic), featured works from paintings to sculptures to video art, by dozens of local and internationally acclaimed artists.
A painting by Afghan-German Jeanno Gaussi entitled Moghul Dream displayed a historical-style south Asian landscape.
Outside, another work, a set of traffic lights connected to an electrical supply, read "Love" when switched to green.
The museum was inaugurated in the presence of Israel's First Lady Nechama Rivlin.
"This museum, which combines the work of Jewish and Arab artists, is a revolutionary museum," Rivlin said during the ceremony. "It's a museum which calls for a meeting, it's a museum which challenges the artist living in his private domain and calls on him to meet with other artists."
Sakhnin Mayor Mazen Ghanayem added, "Culture crosses boundaries, and it's very important because art brings the hearts of all people closer together."
"We found Sakhnin to be a suitable place for the museum, it being right in the heart of Galilee," co-director Belu-Simion Fainaru told AFP.
"We're involving artists from the region, and setting it up here will develop art in the area and will put contemporary art within reach of the masses, Arab and Jewish alike."
Fainaru and co-director Avital Bar-Shay worked closely with Arab Mayor Ghanayem to open the museum, which they say will emphasize multiculturalism.
"The aim of establishing the museum was for the world to get to know our artists - and there are so many here - and so that art in the region could develop and stimulate cultural and economic movement," Ghanayem said.
"Art knows no boundaries, and transcends international borders, is removed from politics and brings people together in hope of peace," he said.