The agreement to reduce or eliminate tariffs by the seven nations of the group is to come into force from the start of 2006, but its success hinges on peace moves by India and Pakistan, its biggest members.
SAARC's developing states - Pakistan, India and Sri Lanka - will cut tariffs to between zero and five percent within seven years of the start of the agreement.
Its least developed states - Nepal, Bangladesh, Bhutan and the Maldives - have 10 years to complete the process, though all members can maintain a list of sensitive products on which tariffs will not be reduced.
The historic summit saw the first talks between India and Pakistan since 2001 and raised hopes for further regional cooperation.
It ended with leaders of the seven nations hailing the three-day meeting as a 'watershed' for the region.
"This summit marks a watershed in enhancing South Asian regional cooperation," Bangladeshi Prime Mininster Khaleda Zia declared in her closing address at Islamabad's Jinnah Convention Centre.
Host Pakistan's prime minister, Zafarullah Jamali, declared the