Israeli Prime Minister Benjamin Netanyahu said the deal would lead to "full" peace with the Gulf Arab state.
Prime Minister Benjamin Netanyahu has said a deal between Israel and the United Arab Emirates represented a "historic day" for his country.
Under the accord agreed on Thursday, which US President Donald Trump helped broker, Israel has agreed to suspend its planned annexation of areas of the occupied West Bank. The agreement also firms up opposition to regional power Iran, which the UAE, Israel and the United States view as the main threat in the conflict-riven Middle East.
Israel had signed peace agreements with Egypt in 1979 and Jordan in 1994. But the UAE, along with most other Arab nations, did not recognise Israel and had no formal diplomatic or economic relations with it until now. The UAE becomes the first Gulf Arab country to reach such a deal with the Jewish state.
A joint statement said Trump, Israeli Prime Minister Benjamin Netanyahu and Abu Dhabi's Crown Prince Sheikh Mohammed Bin Zayed had "agreed to the full normalisation of relations between Israel and the United Arab Emirates".
"This historic diplomatic breakthrough will advance peace in the Middle East region and is a testament to the bold diplomacy and vision of the three leaders and the courage of the United Arab Emirates and Israel to chart a new path that will unlock the great potential in the region," the statement said.
In a separate statement, the crown prince stressed that the agreement would stop further Israeli annexation of Palestinian territories, which Israel has said had been awaiting a green light from Washington.
The agreement, to be known as the Abraham Accords, also gives Trump a foreign policy accomplishment as he seeks re-election on November 3.
"HUGE breakthrough today! Historic Peace Agreement between our two GREAT friends, Israel and the United Arab Emirates," Trump wrote on Twitter.
In the White House Oval Office, Trump said similar deals are being discussed with other countries in the region.
HUGE breakthrough today! Historic Peace Agreement between our two GREAT friends, Israel and the United Arab Emirates!— Donald J. Trump (@realDonaldTrump) August 13, 2020
Trump later said he would host a summit for the signing of a historic peace accord between Israel and the United Arab Emirates in around three weeks.
"I look forward to hosting them (the Israeli and UAE leaders) at the White House very soon to formally sign the agreement," he told reporters.
"We'll probably be doing it over the next, I would say, three weeks."
The UAE said it would remain a strong supporter of the Palestinian people and that the agreement maintained the viability of a two-state solution to the longstanding Israel-Palestinian conflict.
A senior Israeli official said applying Israeli sovereignty to areas of the West Bank was still on the agenda, adding, "The Trump administration asked us to temporarily suspend the (sovereignty) announcement so that the historic peace agreement with the UAE can be implemented."
'Nightmare' for Iran
US Secretary of State Mike Pompeo, who is on a trip to Central European countries, said: "This is an enormous, historic step forward. Peace is the right path forward."
Trump's special envoy Brian Hook called the deal a "nightmare" for Iran.
There was no immediate response from the Iranian government but the Tasnim news agency, affiliated with Iran's powerful Revolutionary Guards, called the accord "shameful".
Iran and Israel are arch-foes. Israel is particularly concerned about suspected Iranian efforts to develop nuclear weapons, which Tehran denies. Iran is also involved in proxy wars from Syria to Yemen, where the UAE has been a leading member of the Saudi-led coalition opposing Iran-aligned forces there.
With a population of less than 10 million but the Arab world's second-largest economy thanks to oil, the UAE has exerted growing commercial and military clout in the Gulf and the wider region over the past two decades, much of it aimed at confronting Islamist militants and the influence of Iran.
US lawmakers have tried to rein in Trump administration plans for arms sales, particularly to Saudi Arabia and the United Arab Emirates for use in the war in Yemen.
During a call with President Trump and Prime Minister Netanyahu, an agreement was reached to stop further Israeli annexation of Palestinian territories. The UAE and Israel also agreed to cooperation and setting a roadmap towards establishing a bilateral relationship.— محمد بن زايد (@MohamedBinZayed) August 13, 2020
More deals in pipeline
Delegations from Israel and the United Arab Emirates will meet in the coming weeks to sign agreements regarding investment, tourism, direct flights, security, telecommunications and other issues, the statement said.
The two countries, which agreed in June to cooperate in the fight against the coronavirus in a sign of closer ties, are expected soon to exchange ambassadors and embassies.
The joint statement said that "as a result of this diplomatic breakthrough and at the request of President Trump with the support of the United Arab Emirates, Israel will suspend declaring sovereignty" over areas of the West Bank that were envisioned in a US plan announced by Trump in January.
A signing ceremony including delegations from Israel and the United Arab Emirates is due to be held at the White House in the coming weeks.
The agreement envisions giving Muslims greater access to the Al-Aqsa Mosque in the Old City of Jerusalem by allowing them to fly from Abu Dhabi to Tel Aviv, White House officials said.
"I followed with interest and appreciation the joint statement between the United States, United Arab Emirates and Israel to halt the Israeli annexation of Palestinian lands and taking steps to bring peace in the Middle East," Egyptian President Abdel Fattah al Sisi said on Twitter, as he welcomed the deal.
"I value the efforts of those in charge of the deal to achieve prosperity and stability for our region."
Sisi also called Abu Dhabi's Crown Prince Sheikh Mohammed bin Zayed al Nahyan to congratulate him on the "historic peace step" undertaken by the UAE, according to an Egyptian presidency statement.
British Prime Minister Boris Johnson also welcomed the agreement and said, it was my profound hope that annexation did not go ahead in the West Bank and today’s agreement to suspend those plans is a welcome step on the road to a more peaceful Middle East, on Twitter.
Foreign Minister Dominic Raab said it was "time for direct talks between the Palestinians and Israel, the only route to lasting peace."
United Nations Secretary-General Antonio Guterres welcomed "any initiative that can promote peace and security in the Middle East region," a UN spokesman said.
Guterres had urged Israel in June to abandon plans to annex settlements in the West Bank, warning that this threatened prospects for peace with the Palestinians.
“History will definitely record the defeat of those who betrayed the Palestinian people and their cause,” said Turkey’s presidential spokesperson Ibrahim Kalin on Twitter.
"The decision taken within this framework by the Israeli authorities to suspend the annexation of Palestinians territories is a positive step, which must become a definitive measure," French Foreign Minister Jean-Yves Le Drian said in a statement.
Palestinian official slams deal
Palestinian President Mahmoud Abbas denounced Israel's accord with the United Arab Emirates in a statement issued by his spokesman.
“The Palestinian leadership rejects and denounces the UAE, Israeli and US trilateral, surprising, announcement,” said Nabil Abu Rudeineh, a senior adviser to Abbas.
Abu Rudeineh, reading from a statement outside Abbas's headquarters in Ramallah in the occupied West Bank, said the deal was a "betrayal of Jerusalem, Al Aqsa and the Palestinian cause."
Iranian official Amirabdollahian also said UAE-Israel agreement will not bring peace to the region and UAE 'will be caught in the fire of Zionism' on Twitter.