The foreign ministry expressed its "regret regarding the Vatican decision to officially recognise the Palestinian Authority (PA) as a state, in the agreement signed today," spokesman Emmanuel Nahshon said in a statement.
"This hasty step damages the prospects for advancing a peace agreement, and harms the international effort to convince the PA to return to direct negotiations with Israel," he said.
The accord, a treaty covering the life and activity of the Church in Palestine, was the first since the Vatican recognised the Palestinian state in February 2013.
The Vatican's recognition of the state of Palestine followed a November 12 vote in favour of recognition by the UN General Assembly.
Vatican officials have described it as reflecting the Church's desire to see the conflict in the Holy Land resolved by a "two-state" solution.
The Vatican has had diplomatic relations with Israel since 1993 but has yet to conclude an accord on the Church's rights in the Jewish state which has been under discussion since 1999.
"Israel cannot accept the unilateral determinations in the agreement which do not take into account Israel's essential interests and the special historic status of the Jewish people in Jerusalem," he added.
"Israel will study the agreement in detail, and its implications for future cooperation between Israel and the Vatican.
