Netta Barzilai beat 25 other contestants with her uptempo song "Toy", whose lyrics were inspired by the #MeToo movement.
The 25-year-old, who wore a multicoloured kimono, accompanied her winning performance with trills, clucking sounds and chicken-like dance moves in an eye-catching and bizarre performance that is often typical of the Eurovision contest.
Crowds broke out in song in Tel Aviv's Rabin Square, with many jumping in the fountain there, as well as at Jerusalem's main open air market to celebrate the victory.
Video footage of Netanyahu's brief chicken dance was being shared on social media, while the prime minister also spoke of Barzilai's victory at the start of his weekly cabinet meeting.
He replaced the Hebrew phrase for good morning, boker tov, with "boker toy" in reference to the winning song.
Sunday also marked Jerusalem Day for Israel, the annual celebration of what Israelis call the "reunification" of the disputed city after the 1967 Six-Day War.
"These days Jerusalem is being blessed with many gifts," Netanyahu said.
"We received another one last night with Netta's thrilling and suspenseful victory. The gift is that Eurovision will come to Jerusalem next year; we will be very proud to host it."
The Eurovision winner hosts the event the following year.
Social media included everything from tributes to parodies.
One post photoshopped Barzilai's Princess Leia-style hairstyle onto Netanyahu. Others portrayed it as a victory over the BDS movement that campaigns for a boycott of the country over Israel's occupation of Palestinian territory.
There was at least one glitch: Those using automated translation software to decode Netanyahu's Facebook post congratulating Barzilai.
Netanyahu used a traditional Hebrew phrase signifying "you're a real sweetie," but some software translated it as "Netta, you're a real cow," leading to lots of head-scratching on social media.
Israel has now won Eurovision four times. The last was in 1998, with "Diva" by transgender performer Dana International.
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