Developed over 15 years for rescue or military use, the $14m (Â£11m) Cormorant (formerly AirMule) can carry 500kg (1,100lb) at 185km/h (115mph).
Urban Aeronautics says internal rotors make it safer than a helicopter.
And as well as taking off and landing vertically, it can fly between buildings and below power lines.
"It paves the way forward for the evolution of Cormorant from prototype to near-term production and ultimately commercialisation of this groundbreaking technology - for broad applications and markets," said Urban Aeronautics chief executive Rafi Yoeli.
Commercial drones are becoming big business, with Amazon announcing Prime Air, a delivery-by-drone service, in the summer.
In June, another passenger drone - 184 and made by Chinese company Ehang - was given approval for test flights in Nevada.
Dr Mirko Kovac, director of the Aerial Robotics Lab at Imperial College London, said: "The proposed vehicle shows that there is a real potential for personal drones, not just for delivery and environmental sensing but also for transport.
"There still is a lot of technological work that needs to be developed  to make such vehicles safe and easy to use, but if the project comes to the market it can disrupt the way humans move in cities and make fast travel through the air accessible to the masses."
Drone expert Ravi Vaidyanathan, from Imperial's department of mechanical engineering, added that the recent flight of the Israeli drone could be a "landmark" moment in low altitude navigation and initially targeting it for humanitarian rescue and military use is the right move.
"Finding a niche application and establishing a safety record is a good idea," he told the BBC.
But while drones for civilian use were likely to follow, not least because such vehicles could help solve issues such as lack of infrastructure and congestion, the timescale remained uncertain.
"There are are lot of regulatory hurdles such as where do you take off? Where do you land? What altitude do you fly at?" he said.
A passenger drone, which completed its first flight over low terrain in November, could be in use by 2020, the Israeli company behind it has said.