Church officials said it hoped accepting the existence of Palestine would help peace between the country and neighbouring Israel.
Vatican foreign minister Paul Gallagher and his Palestinian counterpart, Riad al-Malki, signed the treaty at a ceremony in Rome.
Last month's announcement of the change in position by the Church was met with anger by Israel.
Today the foreign ministry released a statement reiterating its disapproval of the move.
It warned that it would study the agreement "and its implications for future cooperation between Israel and the Vatican".
But the Vatican said it hoped recognising Palestine "may in some way be a stimulus to bringing a definitive end to the long-standing Israeli-Palestinian conflict, which continues to cause suffering for both parties".
Paul Gallagher added that the treaty could be a model for future agreement between the Vatican and other Middle East countries, where Christians are a minority and often persecuted.
The Vatican had welcomed the decision by the UN General Assembly in 2012 to recognise a Palestinian state and had referred to the Palestine state since.
But the treaty marked its first legal recognition of the Palestinian territory as a state.
Palestinian foreign minister Riad al-Malki said it was an "historic agreement" and that it marked "a recognition of the right of the Palestinian people to self-determination, freedom and dignity in an independent state of their own, free from the shackles of occupation".
The United States and Israel oppose recognising Palestine as a state claiming it undermines efforts to negotiate peace.
Israeli foreign ministry spokesman Emmanuel Nahshon also criticised the Vatican saying the agreement ignored "the historic rights of the Jewish people in the Land of Israel and to the places holy to Judaism in Jerusalem".
