Filmmakers said the new level of representation in the international village of the prestigious festival was a significant step for the Palestinian cinema industry.
The pavilion, one of around 70 representing countries from across the globe, will give Palestinian film-makers an opportunity to pitch their work to top international industry executives.
Mohanad Yaqubi, one of the co-founders of the Palestine Film Institute, said it was a significant moment.
"Almost every year Palestine has a film selected in Cannes but until now we didn't have an official presence there," Yaqubi, who is also a film-maker, told the AFP news agency.
"Industry-wise it is very important to have a presence... (to) network at an industry level," he said in English.
The pavilion will be mostly funded by the Palestinian ministry of culture, which declined to say exactly how much it invested.
Lina Bokhary, head of the ministry's cinema department, said the decision was part of wider efforts to promote Palestinian film.
"All throughout the history of film, for a national film industry to happen you need stability and state investment -- and that is something we never had."
"Cannes is important because it is a hub, the door to all of Europe which is a big market for Palestinian films."
Saudi Arabia, which recently lifted a ban on cinema in the country, is also expected to have its first pavilion at the Cannes film festival which begins on 8 May.
The Palestinian film industry is small and respected, and a number of films have gained critical acclaim in recent years, Bokhary said.
"If in a year we have four or five feature films that would be a very good year," she said.
In 2017, the Palestinian film Ghost Hunting, which focused on Israeli prisons, won best documentary at the Berlin International Film Festival.
Yaqubi said that much of the Palestinian film industry was about humanising Palestinians, who are often seen through the 70-year conflict with Israel.
He said Palestinian film-makers constantly struggle to "change how the West" views Palestinian people and to get rid of the "stigma" surrounding them.
"Changing opinions in the West is our fight more than doing films for entertainment or box office," he said.
"(The Israelis) are winning on the ground, that is obvious, but the fight of image is still going on -- and this is a battle we can do something about."