Kosovo MPs proclaim independence
 |  Albanian and American flags have been on prominent display  |
Declaration The declaration, read by Prime Minister Hashim Thaci, said Kosovo would be a democratic country that respected the rights of all ethnic communities.
But Serbia's PM denounced the US for helping create a "false state" and protesters in Belgrade later pelted the US embassy with stones.
The US and a number of EU countries are expected to recognise Kosovo on Monday.
Before that, the UN Security Council is expected to convene on Sunday evening in an emergency meeting demanded by Serbia's ally, Russia.
Tens of thousands of people had thronged the streets of Kosovo's capital, Pristina, since the morning.
When news came of the declaration in parliament, the centre of the city erupted with fireworks, firecrackers and celebratory gunfire. 
Kosovo Prime Minister
Hundreds of ethnic Albanians staged noisy celebrations in the Macedonian capital, Skopje, and in Brussels, outside the headquarters of Nato and the European Union.
Hand grenades
The first sign of trouble in Kosovo came in the ethnic Serbian area of the flashpoint town of Mitrovica, where two hand grenades were thrown at international community buildings.
One exploded at a UN court building while the other failed to go off outside offices expected to house the new EU mission. 
In Belgrade, demonstrators threw stones and broke windows at the US embassy as riot police tried to fend off a crowd of around 1,000 people.
"Kosovo is the heart of Serbia," the protesters shouted.
Several Serbian ministers had travelled to Kosovo to show their support for the ethnic Serbian minority.
Kosovo's 10 Serbian MPs boycotted the assembly session in protest at the declaration.
Serbia's Prime Minister Vojislav Kostunica blamed the US which he said was "ready to violate the international order for its own military interests".
"Today, this policy of force thinks that it has triumphed by establishing a false state," Mr Kostunica said.
Search for equality
The declaration was approved with a show of hands. No-one opposed it.
"We have waited for this day for a very long time," Mr Thaci told parliament before reading the text, paying tribute to those who had died on the road to independence.
From today, he said, Kosovo was "proud, independent and free".
"The independence of Kosovo marks the end of the dissolution of the former Yugoslavia," the prime minister said.
He said Kosovo would be built in accordance with the UN plan drawn up by former Finnish President, Martti Ahtisaari.
Unfortunately today Kosovo and Serbia are to become two dispensable chess-pieces of EU/NATO and Russia
The international military and civilian presence - also envisaged by the Ahtisaari plan - was welcome, the PM said.
There should be no fear of discrimination in new Kosovo, he said, vowing to eradicate any such practices.
The declaration was signed by all the MPs present.
Ode to Joy
Kosovo's top leaders are due to go to a sports hall later where the Kosovo Philharmonic Orchestra is expected to play Beethoven's Ode to Joy.
They are also due to sign their names on giant iron letters spelling out the word "newborn" which was to be displayed in Pristina.
Some ethnic Albanians, who make up the majority of Kosovo's population, earlier laid flowers on the graves of family members killed by Serbian security forces during years of conflict and division.
The BBC's Nick Thorpe in Mitrovica says local and UN police, as well as the Nato troops, are maintaining a high profile to reassure all the citizens of Kosovo that they have nothing to fear.
The declaration approved by Kosovo's parliament contains limitations on Kosovan independence as outlined in Mr Ahtisaari's plan.
Kosovo, or part of it, cannot join any other country. It will be supervised by an international presence. Its armed forces will be limited and it will make strong provisions for Serb minority protection.
Recognition by a number of EU states, including the UK and other major countries, will come on Monday after a meeting of EU foreign ministers in Brussels, says the BBC's Paul Reynolds.
The US is also expected to announce its recognition on Monday.
Three EU states - Cyprus, Romania and Slovakia - have told other EU governments that they will not recognise Kosovo, says our correspondent.
Russia's foreign ministry has indicated that Western recognition of an independent Kosovo could have implications for the Georgian breakaway provinces of Abkhazia and South Ossetia.
The UN has administered Kosovo since a Nato bombing campaign in 1999 drove out Serb forces.
Show distribution of Albanians outside Kosovo
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