Submitted by Algeria, Egypt, Lebanon, Morocco, Oman, Qatar and Sudan, the resolution also sharply criticizes Israel's construction in eastern Jerusalem's Old City and "deplores" the Jewish state's "continuous" closure of the Gaza strip.
Israel's Deputy Foreign Minister Tzipi Hotovely called the UNESCO move "fake history".
Wednesday's cut was the third time in recent months Israel reduced its United Nations budget over what it perceived as anti-Israel votes, putting the 2017 payments at $3.7 million instead of the original $11 million, an Israeli official said.
Netanyahu called the UNESCO resolution "absurd" and said the agency's "systematic harassment" of Israel had a price.
The Israeli foreign ministry spokesman, Emmanuel Nahshon, wrote on Twitter "Israel is angered by Sweden's vote in favour of the draft resolution". "I thank the countries that acceded to my request to vote against this resolution, especially the United States, which did not need any sort of appeal".
The resolution, submitted by several Arab nations, has softer wording than another UNESCO decision previous year that referred to several sites primarily by their Islamic names and largely ignored Jewish terms. The prime minister also thanked the leaders of Ukraine, Paraguay and Togo for their votes against the resolution.
"Under President Trump, if the world knows nothing else, the world will know this - America stands with Israel", Pence said to applause.
As a result, the Foreign Ministry summoned the Swedish Ambassador to Israel Carl Magnus Nesser.
"There is no other people in the world for whom Jerusalem is as holy and important as for the Jewish people", Netanyahu said in a speech, reported AFP, and said that Unesco is "trying to deny this simple truth".
AJC, the global Jewish advocacy organization, has long supported a negotiated resolution of the Israeli-Palestinian conflict based on two states living side-by-side in peace within secure and recognized borders. We celebrated a hope which came true: "to be a free people in our land, in Jerusalem", Rivlin said.
Moving the U.S. Embassy to Jerusalem is a politically charged act that would anger Palestinians who want east Jerusalem, which was captured in 1967, as a future capital and part of their sovereign territory.