"The two sides discussed ways of boosting cooperation between the two countries in all fields and agreed to resume full diplomatic relations," said a joint statement issued after a visit by interim Iraqi Prime Minister Iyad Allawi.
Kuwaiti Foreign Minister Shaikh Muhammad al-Sabah said ambassadors would be appointed in due course "because there are formalities" which had first to be carried out.
"But the important thing is the resumption of diplomatic ties, which happened. As to the (reopening of) embassies... it will come," he told reporters after Allawi's departure.
The joint statement, issued on the anniversary of 2 August 1990 invasion, said the two neighbours had also agreed to set up a joint higher committee co-chaired by their prime ministers to boost economic links.
Allawi visited Kuwait towards the end of a two-week regional tour.
Iraq's occupation of Kuwait was ended seven months later by a US-led multinational coalition in the 1991 Gulf War. Kuwait served as the main launchpad for last year's US-led invasion of Iraq that ousted Saddam Hussein.