US Trade Representative Robert Zoellick has said it is the most important economic accord between Israel and its neighbour Egypt - which had refused to go along with such a deal since it was first proposed in 1995.
Zoellick attended the Cairo signing ceremony of the free-trade zones agreement along with Egyptian Industry and Foreign Trade Minister Rashid Muhammad Rashid and Israeli counterpart Ehud Olmert on Tuesday.
Relations have often been chilly between Israel and Egypt, which in 1979 became the first Arab country to sign a peace treaty with the Jewish state.
They have taken a turn for the better in recent weeks, however.
Last week, Egypt, keen to revive its role of Middle East peace negotiator, said it could soon return an ambassador to Israel, a move that would revive full diplomatic ties after a break of four years since the Palestinian uprising began.
Under the latest trade accord, the free zones will be set up in Greater Cairo and the Mediterranean cities of Alexandria and Port Said.
A free zone is to be set up in Port
Said under the latest accord
The accord allows goods from the three zones to enter the US without customs tariffs, provided 35% of the product results from cooperation between Israel and Egyptian companies.
Also, Israel's input must be a minimum of 11.2%. The Israelis wanted a level of between 15% and 17%, while Egypt proposed only 8%.
The accord will boost the volume of Israeli-Egyptian trade to $70 million a year from the current annual level of $44 million, according to Oded Tirah, president of the Israeli Manufacturers' Association.
Rescuing textile production
"It is the most important economic breakthrough since the signing of the peace treaty between Israel and Egypt at the end of the 1970s," a senior Israeli official said recently.
Cairo had resisted the US-backed deal for several years, but its hand was forced by new US textile import regulations which will come into force on 1 January that could have dealt a knock-out blow to Egypt's key sector.
"It is the most important economic breakthrough since the signing of the peace treaty between Israel and Egypt at the end of the 1970s"
Unnamed Israeli official
The new regulations could have cost $479 million in lost Egyptian exports and the scrapping of 200,000 jobs, according to Egypt's Finance Minister Yusuf Butrus-Ghali.
Egyptian business people's association president Jamal al-Nazir said the free-trade zones were the only means to rescue the textile sector and stimulate direct foreign investment, which reached a low of $400 million in 2003.