Iraqi and Turkish railway officials signed the agreement in Baghdad, saying the line would transport food and reconstruction supplies to Iraq.
Four trains a week will move goods from Turkey through Syria and into Iraq.
The railway, which runs from Istanbul to Baghdad and the southern city of Basra, will deliver supplies to a country recovering from the recent United States-led invasion and the economic sanctions imposed on it since the 1991 Gulf war.
Financed with German money and connecting far-flung regions of the erstwhile Ottoman Empire, construction of the original Baghdad Railway began in the late 19th century.
The line served as a symbol of the growing influence of Germany in the Middle East. Britain saw the railway as a threat to its empire in India, and the project was regarded by historians as one of the triggers for World War One.