Palestinian football chief Jibril Rajoub withdrew his association's bid to have FIFA suspend Israel from international football on Friday before shaking hands with his Israeli counterpart.
"I have decided to drop the resolution for the suspension," Rajoub told the FIFA congress in Zurich before shaking the hand of Israeli FA president Ofer Eini.
"A lot of colleagues, whom I respect and whose commitment to the ethics and values of the game I appreciate, told me how painful it is to hear of the issue of suspension."
But Rajoub demanded that FIFA help tackle racism and problems of movement facing Palestinian players in the occupied West Bank before waving a red card at delegates to emphasise his point.
Palestine, which has been a FIFA member since 1998, had wanted the governing body to expel Israel over its restrictions on the movement of Palestinian players.
It had also opposed the participation in the Israeli championships of five clubs located in Jewish settlements in the occupied West Bank.
In an equally passionate address, Israeli football chief Eini said it is now up to the two associations to find a common ground to promote football and help each other in the troubled region.
"Football must serve as a bridge to peace," said Eini.
"I'm saying to my friend Rajoub, let the politicians deal with the political points.
"Let's do the best for football on both sides. I want us to work together and to be able to cooperate.
"We should be able to solve problems by speaking to one another.
"There will always be disputes, but if we speak together, we can solve the problems."
A FIFA committee, which will include figures from both the Israeli and Palestinian governing bodies, will be set up to resolve issues facing those in football on the West Bank after the congress voted for the initiative.
Israel welcomed the avoidance of an "absurd situation" after the motion was withdrawn.
"The result of talks at FIFA is positive and I welcome the fact that we didn't arrive at an absurd situation in which a state like Israel would have been suspended from a body whose vocation is, before all, sporting," Israel's assistant foreign affairs minister Tzipi Hotovely said.
But he warned that Israel would be fast to combat any future bids to expel it.
"In the future we will oppose by all our means states and organisations that want to delegitimise Israel," the minister warned.
"We will not allow them to influence the decisions of international organisations."
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Updated Date: May 29, 2015 20:28:15 IST