Prime Minister Hashim Thaci read the declaration, saying the new country will be "dedicated to peace and stability."
All 109 deputies present at the session in the capital Pristina voted in favor with a show of hands. Deputies from ethnic minorities, including Serbs, were absent.
The 12-point text says Kosovo is dedicated to "peace and stability" in the region and declares its will for a "good relationship" with its neighbors.
The declaration says Kosovo is created along the lines of a UN plan drawn up by former Finnish President Martti Ahtisaari. The plan called for the territory's supervized independence by an international presence.
The plan was opposed by Serbia, whose ally Russia has blocked its approval at the UN Security Council.
In a statement, Serbian President Boris Tadic said Belgrade will react with all "peaceful, diplomatic, and legal" means to annul the declaration of independence.
RFE/RL's Pristina bureau chief, Arbana Vidishiqi, described the atmosphere as "festive" in the wake of a night of euphoric celebrations in the capital.
"There are flags all over Pristina and all over Kosovo, on every institution building, in the streets, on every car, on most of the balconies. There's music everywhere," Vidishiqi said.
One man said he had come back from Albania to Pristina for "this big day": "My ancestors left Kosovo, they fled their land a long time ago. I, not only for myself but also for my ancestors and also for those who gave their lives for this day, I came here for this big day."
On the evening of February 16, thousands of Albanians poured into the streets, waving Albanian, U.S., British, European Union, and NATO flags, honking car horns, and setting off fireworks.
Prayers And Protests
Meanwhile, the province's minority Serbs held prayers and protests against the secession.
In Belgrade, hundreds of Serbian demonstrators protested against the loss of territory.
Vidishiqi said UN and local police, as well as NATO troops, have increased security measures ahead of the expected declaration of independence, but no incident has been reported yet.
On February 16, the EU approved sending a police and justice mission to Kosovo to help enforce the rule of law there.
The 1,800-strong mission, known as EULEX, will begin deploying from next week and is expected to take over from the United Nations by early June. The UN has administered Kosovo since a NATO bombing campaign in 1999 drove out Serbian forces.
The United States and major European Union nations are expected to recognize the new state. But Serbia and Russia fiercely oppose the move and insist the presence of the EU in Kosovo will be illegal.
Belgrade has threatened to use diplomatic and economic measures against Kosovo, though it has ruled out using force. The Serbian government adopted a resolution on February 15 calling any unilateral act by Kosovo to declare independence invalid and illegal.