The bill, which has the status of a basic law (approximately the same as a constitutional law in countries with a written constitution), was passed overnight to Thursday with 62 votes in favor and 55 against after hours of fierce argument and debate. It will now come into force as soon as it's published in the Knesset's Official Gazette.
The law, which had been in the works since 2011, has sparked a wave of protests, which spilled over the Israeli border and angered the influential Jewish diaspora in the US.
The bill formally defines the main principles that should stand at the core of the Israeli state and its symbols, such as the flag, the anthem, its capital and language. In a clause that set Arab lawmakers off, the bill explicitly states that "the right to exercises national determination in the State of Israel is unique to the Jewish people."
The critics of the bill argue that such wording makes some 1.8 million Israeli Arabs, a quarter of the population, second-class citizens.
Another contentious clause strips the Arabic language of its official status, instead granting it "a special status" and leaving Hebrew as the only official state language. Although the bill specifically points out that "this clause does not harm the status given to the Arabic language before this law came into effect," its opponents have been up in arms over the wording change.
At the center of the controversy is the part of the law aimed at promoting the "establishment and consolidation" of Jewish settlements, which is being castigated by the opposition as a shorthand for segregation bordering on apartheid.
The divisive nature of the new legislation that saw thousands of people, including Arabs and secular Jews flocking to streets in protest, has not stopped Israeli Prime Minister Benjamin Netanyahu from hailing its adoption as a huge success.
"With this law we determined the founding principle of our existence. Israel is the nation state of the Jewish people, and respects the rights of all of its citizens," Netanyahu said, as cited by Haaretz.
As the bill was narrowly passed, Arab MPs did not hide their frustration shredding their drafts to pieces in protest before confronting Netanyahu and storming out of the chamber.
"You passed an apartheid law, a racist law," MPs Ahmed Tibi and Ayeda Touma-Souliman from The Joint List, a coalition of Arab-dominated parties in the Israeli Parliament, shouted to the Israeli leader as he lauded the freshly-approved legislation.
Netanyahu brushed off all argument that the law prioritizes the rights of Jews at the expense of Arabs, touting the Jewish state as "the only democracy in the Middle East."
But the Jewish community itself has been split about the law. Before it was adopted, 14 American Jewish organizations relayed their concerns to the incoming Jewish Agency Chairman Isaac Herzog, who has been a vocal critic of the bill himself.
For instance, New Israel Fund CEO Daniel Sokatch called the bill "completely incompatible" with the "democratic foundation" of the Israeli state.
Speaking ahead of the vote, Herzog warned that while fostering the Jewish state, the law might deal a blow to democratic values.
"I really hope that we won't find the fine balance between a Jewish and democratic state to be hurt," he said, as cited by Haaretz.
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