It's the latest Middle Eastern country to do so, following the United Arab Emirates.
The agreement makes the UAE the third Arab country, after Egypt and Jordan, to have full diplomatic ties with Israel.
In a draft, Democrats shied away from using the term "occupation" to describe Israel's military rule over millions of Palestinians. Activists want a change before the final vote.
The president's plan calls for the creation of a Palestinian state but leaves sizable chunks of the occupied West Bank in Israeli hands.
The Palestinians have already rejected the proposal, accusing Trump of being biased in favor of Israel.
The secretary of state said the U.S. no longer considers the expansion of Israeli settlements in the West Bank to be a violation of international law.
Sanders' idea linking U.S. aid to Israel's conduct “has no support here on Capitol Hill,” said a Democratic member of the Senate Foreign Relations Committee.
“In dealing with Bibi, it’s always useful to carry a healthy amount of skepticism," the former secretary of state said in a talk at Harvard.
Activists have been criticizing Israeli policies towards Palestinians long before the Minnesota congresswoman.