It prompted speculation that the Pope would visit Jerusalem in the New Year. He has accepted an invitation in principle but no date has been set. While the deal was hailed as a diplomatic breakthrough, only a visit by the Pope would truly dispel Jewish mistrust of the Catholic Church, which is held largely responsible for fuelling anti-Semitism over the centuries by preaching that the expulsion of the Jews from Israel was punishment by God for refusing to accept Jesus as the Messiah.
Under the deal, signed at the Foreign Ministry by Yossi Beilin, Israel's deputy foreign minister, and Monsignor Claudio Celli, the Vatican under-secretary for foreign relations, the Vatican agrees to fight anti-Semitism and both sides pledge to encourage Christian pilgrimage to the Holy Land.
The reconciliation, which bolsters hopes for Middle East peace, was hailed by the government as the latest and perhaps most significant signal of Israel's fast- growing international recognition.
But the Islamic Resistance Movement, Hamas, condemned the deal, saying the Palestine Liberation Organisation had paved the way for it by its 'humiliating' accord with Israel.
The Vatican had refused to recognise Israel since it was established in 1948, arguing that to do so would be contrary to international law. Israel's treatment of Palestinians and its annexation of Arab east Jerusalem have often been cited by the Vatican as reasons for diplomatic distance, as has the need to protect Christians in the Arab world.
However, the Vatican's legal and political stance has been seen by Israel as a cover for its theological objection to the founding of the state. When the Madrid peace process began in 1991, the Vatican's position became untenable and reformists said refusal to grant recognition was only fuelling Jewish suspicion of the Vatican's true motives.
Yesterday Israeli newspapers reminded readers of the roots of this mistrust. The Catholic Church 'persecuted the Jews in the Middle Ages and the pages of its history are stained with Jewish blood', said the liberal Ha'aretz, noting that this persecution culminated in the Holocaust.
It was also suggested that the Church may be seeking ties in order to participate in talks on Jerusalem and hamper Israel's claims of sovereignty, which are not recognised by the Vatican or the international community.
In Rome, a spokesman said that, in common with most other states, the Vatican's embassy would not be in Jerusalem. The Vatican's position had not changed; its policy on Jerusalem was 'mirrored in the consensus of the international community'.