The alternative was conceived as "a battle fought with the same rules and regulations as those imposed by the [US] empire to divide the people", Castro said on Tuesday.
Naming the new pact the Bolivarian Alternative for the Americas (ALBA), the presidents said it would eliminate trade barriers and tax obstacles, provide incentives for investment, increase banking relations and tourism cooperation.
Venezuela promised financing for Cuban industrial and infrastructure projects, while Cuba agreed to pay a minimum price of $27 per barrel of Venezuelan oil, as part of the accord "to apply the Bolivarian Alternative for the Americas".
Before the signing of the agreement, Castro and Chavez addressed a rally in Havana where both presidents declared the US-proposed Latin American Free Trade Zone dead.
Chavez has long accused the US
of plotting against him
"It is an alternative to the perverse FTAA, which they have been trying to impose on us for years," Chavez said. "FTAA is dead."
Chavez also accused Washington of pursuing imperialist intentions in free trade talks with Andean countries.
Venezuela is one of the biggest suppliers of crude oil to the US, but their relations have been strained by disputes between Chavez and the White House.
Washington has expressed concern over Chavez's close ties to Castro since Chavez won the presidency in 1998.
And US President George Bush's says the FTAA is the solution to the region's deepening poverty.
Chavez is on a two-day visit to commemorate his first encounter in Havana with Castro 10 years ago when he was an army officer recently released from prison for leading a failed coup.
At the time, Castro proclaimed him Venezuela's future leader.
Venezuela currently provides Cuba with 53,000 barrels of oil a day at preferential prices, while Cuba has 13,000 doctors in Venezuela, is helping the country stamp out illiteracy and has treated thousands of Venezuelans in its hospitals.