The Palestinian flag was raised for the first time on Tuesday above a UN agency, the UNESCO headquarters in Paris, an AFP correspondent said.
President Mahmoud Abbas attended the ceremony, during which the Palestinian anthem was played, just weeks after Palestine won admission to the UN agency in a move that sparked fury and reprisals from the United States and Israel.
The Palestinians were admitted to the body in late October, when the UNESCO general assembly voted 107-14 to make Palestine its 195th member.
The result angered the United States, Israel's staunch ally, which says the Palestinians must first reach a peace agreement with Israel before they can become full members of an international organisation.
Washington immediately suspended its funding to the UN body, which selects and oversees World Heritage sites and also works in areas from literacy and media freedom to science and environmental issues.
US President Barack Obama said he had frank and firm words with his French counterpart Nicolas Sarkozy, voicing Washington's disappointment because Paris had supported the Palestinian UNESCO bid.
The US cash freeze deprived UNESCO of 22 per cent of its budget, leaving a hole of $65 million (49 million euros) this year and a $143 million shortfall for 2012-2013.
This forced its director general, Irina Bokova, to announce drastic savings, even though some countries pledged exceptional contributions, among them Indonesia with $10 million and Gabon with $2 million.
Israel, for its part, took its own retaliatory measures, by deciding to accelerate settlements in East Jerusalem and the West Bank and freezing the transfer of funds to the Palestinian Authority.
Every month, Israel transfers tens of millions of dollars in customs duties on Palestinian-bound goods that transit through Israeli ports, but it often freezes them as a punitive measure during disagreements.
Faced with international criticism, Israel later lifted its freeze on the funds which represent a large chunk of the Palestinian Authority's budget.
UNESCO membership has had no impact on the Palestinians' bid for full UN membership. They would need nine votes out of 15 in the Security Council, but the United States has made clear that it would veto the bid.
Abbas, who reiterated on 5 December that he would push on with his campaign for UN membership, will meet Sarkozy after the UNESCO ceremony, then go on a tour that takes him to the capitals of Britain and Turkey.