The Ophir Awards, the prizes of the Israeli Academy of Film, were awarded at a Saturday night ceremony in Haifa, and Ajami, a dramatic story of crime in Jaffa, co-directed by a Palestinian and a Jew, Scandar Copti and Yaron Shani, won the Best Picture award.
The film will now go on to represent Israel as the official selection to be considered for an Oscar nomination.
This is the first time that a film that is primarily in Arabic has won the top prize in the Ophirs.
Ajami also picked up several other awards, including Best Screenplay.
Lebanon, for which Zohar Strauss won a Best Supporting Actor Award, was considered Ajami's strongest competitor. Both films have won numerous awards abroad.