Israeli Prime Minister Benjamin Netanyahu said that an agreement with the UAE and US marked the start of a new era for the region but insisted annexation was still on the table.
In a nationally broadcast statement on Thursday, Mr Netanyahu said the “full and official peace” with the UAE would lead to co-operation in many spheres between the countries and a “wonderful future” for citizens of both countries.
The deal was agreed to in a conference call between Sheikh Mohamed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces, US President Donald Trump and Mr Netanyahu.
"Today a new era began in the relations between Israel and the Arab world," he said at a televised press conference.
Under the terms of the deal, which Mr Trump said would be known as the Abraham Accord, Israel agreed to halt all annexation of Palestinian territories in exchange for establishing diplomatic ties with the UAE.
But Mr Netanyahu said there was no change to his plans to annex parts of the West Bank, only that they were on temporary hold and that implementing annexation would be done with US co-ordination.
He said the Trump administration had asked Israel to put its West Bank annexation plans on hold to move forward with the agreement on ties with the UAE.
The move by Mr Netanyahu risked criticism inside his own hard-line Likud Party, whose members strongly supported annexation.
He appears to be counting on Likud members – and the small, but influential settler movement – seeing that the peace agreement delivered more benefits than unilateral annexation.
Opinion polls have shown that annexation is not a high priority for the vast majority of the Israeli public.
While some moderate settler communities said the diplomatic ties were worth the price of annexation, chairman of the Yesha Council umbrella group of settlement councils, David Elhayani, said Mr Netanyhu had "betrayed my trust and the trust of the residents of Judea, Samaria and the Jordan Valley", Haaretz reported.
Mr Netanyahu also claimed more Arab nations would agree to ties after the historic decision.
“This deal shows the huge change in how Israel is seen in the Middle East," he said.
Meanwhile, a Palestinian Liberation Organisation official said he and his colleagues were not made aware of the agreement before Mr Trump’s announcement.
“We didn’t know,” he said. “I’m shocked.”
The official Palestine TV reported that President Mahmoud Abbas called an urgent meeting of his senior leadership to discuss the agreement and determine a position on it.