Legislation backed by the right-wing government was passed in the early hours of this morning.
"So today we have made a law in stone". This is our anthem and this is our flag. The legislation is defined as a "basic law", granting it quasi-constitutional status.
Adalah, the Legal Center for Arab Minority Rights in Israel, described the law as a bid to advance "ethnic superiority by promoting racist policies".
About 20% of Israel's population of nine million are Arab, with an additional 2.8m Palestinians living in the Israel-occupied West Bank and about 1.7m in the Gaza strip.
Ayman Odeh, the head of the Joint List alliance in the Israeli parliament, also raised a black flag during the debate against the legislation.
The bill would "remove the mask so as to reveal the ugly face of ultranationalist Israel in all its repugnance", Mordechai Kremnitzer, from the faculty of law at the Hebrew University of Jerusalem, wrote in Israel's Haaretz newspaper last week.
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." .
"This is an evil law", he told lawmakers, adding that "a black flag hovers over it".
"This law, passed 50 years after the liberation of Judea and Samaria, will normalize the lives of the residents there", said Shaked, referring to the territory by its biblical name.
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Benny Begin, the son of former Israeli prime minister Menachem Begin, and the founder of Mr Netanyahu's ruling Likud party, abstained from voting, warning of the party's growing disconnect from human rights.
"Such racist and prejudicial legislation is illegal by all standards of worldwide law, democracy, humanity, justice, tolerance, and inclusion", she said.
"If there had been another paragraph that also gives full equality to all citizens of Israel, then I would have been a lot more relaxed", he said. But the Israel Democracy Institute, a nonpartisan think tank, said the bill still threatened to undermine Israel's democratic values.
Mr Netanyahu said the bill was about defending the Jewish character of the state, which was established in 1948 as a homeland for the Jewish people, "for generations to come".
Early drafts of the legislation went further in what critics at home and overseas saw as discrimination towards Israel's Arabs, who have long said they are treated as second-class citizens.
American Jewish organizations also expressed their disapproval of the law.
Lawmakers had removed the most contentious clause of the bill on Sunday which would have allowed the establishment of "separate communities" and which critics had called racist.
The American Jewish Committee, a group representing the Jewish Diaspora, said it was 'deeply disappointed, ' adding that the law 'puts at risk the commitment of Israel's founders to build a country that is both Jewish and democratic'.
Israelis, including President Reuven Rivlin and attorney general, voiced opposition to the earlier draft of the bill.