UNESCO passed a resolution on Tuesday at the organisation's Paris headquarters, denouncing actions taken by Israel to alter the character and status of the holy city of Jerusalem.
It particularly criticised Israel's annexation of Jerusalem following its occupation of the city's east in 1967.
The UN agency said such moves were "null and void and must be rescinded forthwith".
The resolution also criticised Israel's actions in Gaza and Bethlehem.
UNESCO adopted the resolution with 22 member states voting in favour, 10 voting against and 23 abstaining.
The draft resolution was put forth by Algeria, Egypt, Lebanon, Morocco, Oman, Qatar and Sudan.
Israel claims Jerusalem as its united capital, while the Palestinians claim the city's east as the capital of their future state.
The Palestinian foreign ministry welcomed the declaration, calling it "a victory for international law".
It said the decision reaffirmed "the centrality of Jerusalem to world heritage as well as the need to confront the dangers posed by the illegal practises of Israel, the occupying power... which threaten the cultural and historical integrity of these invaluable sites."
Israel not happy
Israeli Prime Minister Benjamin Netanyahu slammed the resolution, saying it denies the Jews' historical connection with Jerusalem by presenting Israel as an occupying power.
"There is no other people for whom Jerusalem is as holy and important as it is for the Jewish people," he said in a statement, accusing UNESCO of "denying that simple truth."
Other Israeli officials also criticised UNESCO for holding the vote on Israel's Independence Day.
Israel and the United Nations Educational, Scientific and Cultural Organization had a similar showdown in October after the body passed an Arab-sponsored resolution that criticised the Jewish state for restricting access to the Al-Aqsa mosque compound in annexed east Jerusalem.
Israel recalled its ambassador to UNESCO over the issue.