The UN general assembly approved the de facto recognition of the sovereign state of Palestine in 2012 but the European Union and most EU countries, have yet to give official recognition.
"The conflict between Israel and Palestine can only be solved with a two-state solution, negotiated in accordance with international law," Lofven said during his inaugural address in parliament.
"A two-state solution requires mutual recognition and a will to peaceful co-existence. Sweden will therefore recognize the state of Palestine."
For the Palestinians, Sweden's move will be a welcome boost for its ambitions.