The UN resolution was approved by a more than two-thirds majority of the 193-member world body - a vote of 138-9, with 41 abstentions including Australia.
In the West Bank city of Ramallah, hundreds crowded into the main square, waving Palestinian flags and chanting "God is great".
Israel accused the Palestinians of bypassing negotiations with the campaign to upgrade their UN status and the United States' UN ambassador Susan Rice described it as "unfortunate and counterproductive".
Senator Carr said Australia had abstained as a "friend of Israel more than a little impatient with the settlement activity which is making the two-state solution more difficult and more complex".
"But we did it as a nation committed absolutely to the right of Israel to survive and the right of Israel to defend itself," he told reporters in Sydney.
"We did so as a nation that urges both sides not to exploit and not to overreact to this vote at the UN."
Senator Carr said there should be no rocket attacks from Hamas-controlled Gaza, an end to Israel's re-settlement activity on the West Bank and no further action in the UN system.
"Let's allow this decision to be absorbed, for this decision to be reacted to by the Palestinian Authority going for a negotiated outcome, and Israel accepting that opportunity," he said.
Australian Greens leader Christine Milne says she is disappointed Australia was not part of the "overwhelming global consensus" that supported the Palestinian bid.
It remained to be seen to what extent abstention would damage Australia's standing on the UN's security council.
"We're out of step in relation to where we need to be in the global community," Senator Milne told reporters in Canberra.
