"This new agreement will allow greater exports from both Israel and Jordan to the United States and the EU," Israeli Trade and Industry Minister Ehud Olmert said.
The deal obliges Jordan to abolish many customs duties on Israeli products by 2010. The EU has long pressed for such a move, which Jordan hopes will secure better customs and trade quota terms with the wealthy bloc.
Israel sees Jordan as a bridge to the Arab world, and views the prospect of close economic and trade ties with an Arab state as an important step towards easing its regional isolation among its more hesitant Arab neighbours.
Scores of demonstrators protested in Amman against the deal, which aroused strong opposition among ordinary Jordanians and Islamist politicians who disapprove of any ties with Israel and voice concern over its regional economic and political hegemony.
Olmert rejected such worries.
Many Jordanians are opposed to
closer trade relations with Israel
"Why should we have hesitation if as a result of such agreements the exports from Jordan create jobs and provide quality of life," he said.
"Why not do it?"
More than 80% of Jordan's exports to Israel and more than 50% of Israeli exports to Jordan will be exempt from duties by 2010, according to Israeli figures. That compares to just 9.7% of normal bilateral Israeli exports and 73% of Jordanian exports enjoying preferential terms now.
Jordan enjoys the warmest ties with Israel among its Arab neighbours, and was the first to strike a Qualifying Industrial Zones (QIZ) deal with the United States, under which Jordanian goods made with Israeli input enjoy duty-free status in the US.
The US has since expanded the concept to other Arab states as a tool to help Israel break out of its regional economic isolation. Egypt struck a QIZ deal earlier in December.
Jordan said Thursday's accord with Israel would bring in millions of dollars in investment and raise exports to the West from its expanding industrial parks.
Israeli minister Olmert: The deal
will create more jobs in Jordan
"The signing is another milestone. It's a success story that we look at repeating," Jordanian Trade and Industry Minister Ahmad al-Hindawi said.
He added that over $600 million in investments had poured into the QIZs in the last few years, creating over 35,000 jobs.
Jordan's QIZ exports to the US market are expected to top $900 million by the end of 2004 compared to a mere $9 million in 1999, Hindawi added.
However, critics of the QIZs say the politically inspired deals add minimal value, attracting foreign textile investors who seek quota exemptions in labour-intensive factories.
Israeli officials said Thursday's agreement redressed an imbalance in the original partial trade deal of 1995, which Israel says was tilted in Jordan's favour.
"It's almost as close as a free-trade agreement in the end of 2010. We are speaking of thousands of products on both sides and it will be reciprocal," Gabby Bar, a senior Israeli ministry of industry and trade official, said.
"What we have started in Jordan is now already a source of inspiration for other countries to follow up. It will serve as a model for many other countries in the region"
Israeli Trade and Industry Minister
Israeli officials said Israel's broad economic ties with Jordan served as a model for other hesitant Arab countries that have so far resisted any dealings with Israel until a final Arab-Israeli peace deal is concluded.
"What we have started in Jordan is now already a source of inspiration for other countries to follow up. It will serve as a model for many other countries in the region," Olmert said.
"If we have such agreements, we have better chances of improving the overall relations between us and all the other Arab countries, including the Palestinians."