In an audio recording distributed online, the Islamic State of Iraq and the Levant (ISIL) declared its chief Abu Bakr al-Baghdadi "the caliph" and "leader for Muslims everywhere".
"The Shura (council) of the Islamic State met and discussed this issue (of the caliphate)... The Islamic State decided to establish an Islamic caliphate and to designate a caliph for the state of the Muslims," said ISIL spokesman Abu Mohammad al-Adnani.
"The jihadist cleric Baghdadi was designated the caliph of the Muslims," said Adnani.
Baghdadi "has accepted this allegiance, and has thus become the leader for Muslims everywhere".
"The words 'Iraq' and 'the Levant' have been removed from the name of the Islamic State in official papers and documents," Adnani said, describing the caliphate as "the dream in all the Muslims' hearts" and "the hope of all jihadists".
Ever since the Prophet Mohammed's death, a caliph was designated "the prince" or emir "of the believers".
After the first four caliphs who succeeded Mohammed, the caliphate lived its golden age in the Omayyad empire from the year 661 to 750, and then under the Abbasids, from 750 to 1517.
It was abolished when the Ottoman empire collapsed in 1924.
In the recording, Adnani demanded that "all Muslims all pledge allegiance to the caliph".
Celebrations in Syria stronghold
An activist in Raqa, the bastion of ISIL, told AFP via the Internet: "Large convoys of ISIL members arrived in the city just as the declaration was issued, to celebrate their caliphate.
"There was very intense gunfire. ISIL supporters were shooting in the air with joy," Hadi Salameh said.
"I even saw seven ISIL members come into Raqa on horseback."
Another activist, Abu Ibrahim, said via Facebook: "ISIL members in Al-Naim Square (in Raqa) are calling on all residents to pledge their loyalty."
Opposed to ISIL, both Salameh and Abu Ibrahim said they feared the consequences of the declaration.
"More jihadists will be drawn to join ISIL, and they will become stronger. It's crazy," said Abu Ibrahim.
In Syria, ISIL's fighters control large swathes of territory in Deir Ezzor near the Iraq border, Raqa in the north, as well as parts of neighbouring Aleppo province.
In Iraq, it has spearheaded a lightning offensive in recent weeks, capturing sizeable territories in the north and west of the conflict-torn country.
Once welcomed in Syria by rebels seeking President Bashar al-Assad's ouster, ISIL quickly earned the wrath of the Syrian opposition because of its systematic abuses.
On a near-daily basis, reports have emerged of ISIL jihadists summarily executing political and military rivals, as well as average civilians.
It has kidnapped thousands of people, including many rebels seeking Assad's overthrow.
ISIL's announcement was met with intense celebratory gunfire in Raqa in northern Syria, according to an activist in the jihadist-controlled town.