Israel and the Gulf state of Bahrain have reached a landmark deal to fully normalise their relations, US President Donald Trump has announced.
"The second Arab country to make peace with Israel in 30 days," he tweeted.
For decades, most Arab states have boycotted Israel, insisting they would only establish ties after the Palestinian dispute was settled.
But last month the United Arab Emirates (UAE) agreed to normalise its relationship with Israel.
There had been much speculation that Bahrain might follow suit.
Mr Trump, who presented his Middle East peace plan in January aimed at resolving the Israel-Palestinian conflict, helped broker both accords.
Bahrain is only the fourth Arab country in the Middle East - after the UAE, Egypt and Jordan - to recognise Israel since its founding in 1948.
Israel's Prime Minister Benjamin Netanyahu said he was "excited" that "another peace agreement" had been reached with another Arab country on Friday.
"This is a new era of peace. Peace for peace. Economy for economy. We have invested in peace for many years and now peace will invest in us," he said.
"Another historic breakthrough today!" Mr Trump wrote on Twitter, adding: "Our two GREAT friends Israel and the Kingdom of Bahrain agree to a Peace Deal."
The president also posted on Twitter a copy of a joint statement between the three leaders - Mr Trump, Mr Netanyahu and Bahrain's King Hamad bin Isa bin Salman al-Khalifa.
"This is a historic breakthrough to further peace in the Middle East" that will "increase stability, security, and prosperity in the region", the statement reads.
The UAE welcomed the latest move. The ministry of foreign affairs said it was "another significant and historic achievement which will contribute enormously to the stability and prosperity of the region".
However, there was an angry response from Palestinian officials.
The Palestinian foreign ministry recalled its ambassador to Bahrain for consultation and a statement from the Palestinian leadership spoke of the "great harm it causes to the inalienable national rights of the Palestinian people and joint Arab action".
The Palestinians have long relied on a unified Arab response on the issues of Israeli withdrawal from occupied territory and the acceptance of a Palestinian state.
Hamas, the militant Islamist group that controls Gaza, said the move "represents a grave harm to the Palestinian cause".
Hossein Amir-Abdollahian, a special adviser on international affairs for the speaker of Iran's parliament, said it was a betrayal of the Palestinian cause, Reuters reports.
There is a backdrop of the regional rivalry between Saudi Arabia and Iran in these diplomatic moves.
The decades-old feud between them is exacerbated by religious differences. They each follow one of the two main branches of Islam - Iran is largely Shia Muslim, while Saudi Arabia sees itself as the leading Sunni Muslim power.
The UAE and Bahrain - both Saudi allies - have shared with Israel worries over Iran, leading to unofficial contacts.
Saudi Arabia's response will be watched closely. There is no indication yet it is ready to follow Bahrain and the UAE.
Prior to the announcement of the UAE agreement in August - which included the suspension of Israel's controversial plans to annex parts of the occupied West Bank - Israel had had no diplomatic relations with Gulf Arab countries.
Last month saw the first official flight from Israel to the UAE, which was seen as a major step in normalising relations.
President Trump's son-in-law and senior adviser Jared Kushner, who was on the plane, described the UAE deal as having "the ability to change the whole course of the Middle East".
Bahrain last week said it would allow flights between Israel and the UAE to use its airspace.
Mr Trump is due to host a ceremony at the White House in Washington next Tuesday for the official signing of the Israel-UAE agreement.
In 1999, Mauritania, a member of the Arab League in north-west Africa, established diplomatic relations with Israel - but severed ties in 2010.
Source: BBC