Paraguayan President Horacio Cartes inaugurated his country's Israel embassy in Jerusalem on Monday, making it the third nation to make the deeply controversial move after the United States and Guatemala.
Cartes and Israeli Prime Minister Benjamin Netanyahu spoke at the inauguration of the new embassy in a Jerusalem office park.
The Paraguayan leader called it a "historic event".
"This act has profound significance in the sense that it expresses Paraguay's sincere friendship and full solidarity with Israel," he said.
Netanyahu said cooperation between the two countries would become "greater," naming areas such as agriculture, security and technology.
The South American nation of some seven million people follows in the footsteps of the United States, which broke with decades of international consensus when it declared Jerusalem Israel's capital in December.
Washington followed up on the declaration by moving its embassy from Tel Aviv to Jerusalem on May 14.
The US embassy opening was accompanied by mass protests and clashes along the Gaza border that saw 62 Palestinians killed by Israeli gunfire.
Israel has sought to persuade other countries to follow the White House move, but so far only Paraguay and Guatemala have done so.
Guatemala opened its new embassy in the same Jerusalem office park as Paraguay's on May 16.
Jerusalem's status is perhaps the thorniest issue in the Israeli-Palestinian conflict.
Israel considers the entire city its capital, while the Palestinians see east Jerusalem as the capital of their future state.
Israel occupied the West Bank and east Jerusalem in 1967 and later annexed east Jerusalem in a move never recognised by the international community.