Fatima Payman has become the first Labor senator to cross the floor in almost two decades, voting for a Greens motion on the recognition of a Palestinian state.
Under internal rules, Labor MPs cannot cross the floor and vote against the party's policy positions.
The West Australian senator joined the Greens and independent senators David Pocock and Lidia Thorpe to support a motion on "the need for the Senate to recognise the State of Palestine" in the upper house on Tuesday.
The motion was voted down 42 to 13.
Speaking after the motion, Payman said she was not elected as a "token representative of diversity", but to serve the people of Western Australia and uphold the values instilled in her by her late father.
"Today I have made a decision that would make him proud, and make everyone proud who [is] on the side of humanity," she told reporters in Canberra.
Payman called choosing to cross the floor "the most difficult decision I have had to make".
She added that while "each step I took across the Senate floor felt like a mile, I know I did not walk these steps by myself, and I know I did not walk them alone".
She said she had "indirectly" been told that she could face expulsion from the party, under Labor party rules.
"I still have the core values of the Labor Party and hope to continue serving as a Labor Party senator," she said.
"We cannot believe in two-state solutions and only recognise one", she said, referring to Australia's longstanding policy of a two-state solution.
Foreign Minister Penny Wong sought to adjust the motion and the Opposition sought to add caveats, but both failed.
A government spokesperson said previous caucus members have crossed the floor without facing expulsion and "there is no mandated sanction in these circumstances."
"The Senator says she maintains strong Labor values and intends to continue representing the Western Australians who elected her as a Labor senator.
"As reflected in our amendment, the Government supports the recognition of a Palestinian state as part of a peace process towards a two-state solution."
Payman previously broke ranks with her party in May, saying it was "imperative" to recognise statehood as she accused Israel of genocide in Gaza as the death toll mounts.
Greens senator Mehreen Faruqi branded the government's rhetoric against Israel tepid, saying "all of which Israel has ignored and will continue to ignore".
"Doctors who are returning from Gaza are calling it hell on Earth," she said.
"The need for justice for Palestine and the recognition of statehood has never been more urgent."
The simply worded motion was in line with Labor's policy platform, she said.
Executive Council of Australian Jewry co-CEO Alex Ryvchin said: "The Greens can't be allowed to set the agenda on Israel and Australian foreign policy."
Labor has affirmed it will recognise a Palestinian state but with no timeline attached.
Wong said it would form part of a peace process for a two-state solution and could no longer be pushed back until a negotiated peace settlement was agreed.
Australia has called for Israel to follow international humanitarian law and said it was "gravely concerned" about a United Nations inquiry that found .
