Kosovo has established diplomatic ties with Israel in a historic virtual ceremony between diplomats of the two countries.
Kosovo hopes to become the first European or Muslim-majority country to open an embassy in Jerusalem in the next two or three months.
"Today we are making history," said Israeli Foreign Minister Gabi Ashkenazi during the digital ceremony.
"We are opening a new chapter in the historic ties between our two countries, which have travelled a long and difficult road before as peoples before becoming states,'' added Kosovo's foreign minister Meliza Haradinaj-Stublla.
Monday's agreement would make Kosovo just the third country after the US and Guatemala to have its embassy located in Jerusalem, while most other embassies are in Tel Aviv.
The decision on mutual recognition was achieved last September as part of a summit at the White House when Kosovo Prime Minister Avdullah Hoti and Serbian President Aleksandar Vucic agreed to normalise economic ties in the presence of then-President Donald Trump.
Serbia does not recognise its former province of Kosovo as a separate state, and President Vucic warned on Monday that the agreement with Israel could hurt future ties.
"We have invested serious efforts in our relations with Israel in recent years and we are not happy" with this decision, Serbian Foreign Minister Nikola Selakovic told state television on Tuesday.
The recognition of Kosovo will "undoubtedly influence relations between Serbia and Israel", the minister added.
Ashkenazi stated that "Israel wants a stable Balkans" and considers Serbia a "close and significant partner" in the region.
At the Washington summit, Belgrade also agreed to move its embassy in Israel to Jerusalem, but the decision has not been acted upon.
Trump's administration recognised Jerusalem as Israel's capital in late 2017 and moved their embassy there in May 2018, a move widely criticised by many in Europe due to the unresolved conflict.
The Palestinians claim east Jerusalem, captured by Israel in the 1967 war and later annexed, as the capital of a future state, and many countries say the competing claims should be resolved through negotiations.
Meanwhile, most western nations have recognised Kosovo's independence since its parliament declared independence from Serbia in 2008, but Belgrade's allies Russia and China have not.