Israeli Infrastructure Minister Binyamin Ben Eliezer and Egyptian Oil Minister Sameh Fahmi signed the agreement on Thursday during a ceremony on the outskirts of Cairo, also to be attended by Egypt's Prime Minister Ahmed Nazif.
"This is a historic date ... By implementing this agreement, it will be the best indication to show everyone that the peace agreement between Israel and Egypt is solid", Ben Eliezer said after the signing.
A statement from Ben Eliezer's office on Wednesday described the deal as a "government umbrella" for a commercial agreement to be inked in the coming days.
That will be signed between the Israeli Electric Company (IEC) and the Israeli-Egyptian consortium East Mediterranean Gas, which is jointly owned by Egyptian General Petroleum Corporation and the private Israeli company Merhav.
Natural gas pipeline
Under the terms of the memorandum of understanding to be signed, Egypt will supply Israel through a maritime pipeline to the southern town of Ashkelon with 1.7 billion cubic metres of natural gas a year.
The first deliveries of the $2.5billion project are expected in the first quarter of next year, sources in Egypt and Israel said. The agreement is for a period of 15 years.
"It is an opportunity to strengthen economic relations between our two countries"
Binyamin Ben Eliezer,
Israeli Infrastructure Minister
The deal is seen as a significant step in warming up ties between the two neighbours, who still have few economic links, 26 years after signing the first peace agreement between Israel and an Arab country.
Ben Eliezer stressed "the huge political and strategic importance of this understanding on the supply of Egyptian gas.
"It is an opportunity to strengthen economic relations between our two countries and contribute to the stability of the region," the Iraqi born Labour party minister added.
Israeli Prime Minister Ariel Sharon had said he preferred buying gas from Egypt rather than a joint Palestinian Authority-British company for fear that anti-Israeli fighters could benefit from the money.
Egypt and Israel opened negotiations on the gas deal in 2000, but they were suspended after the eruption of the Palestinian intifada (uprising).
Many in Egypt had also denounced the agreement and opposition MPs grilled ministers over the proposed venture.
Ben Eliezer had met Egyptian intelligence chief Omar Suleiman when he visited Israel two weeks ago and is scheduled to holds talks with top officials in Cairo, including President Hosni Mubarak.
The deal comes at a time of intense diplomatic activity between the two countries over the Israeli withdrawal from the Gaza Strip slated for August.
The pullout is expected to see Egypt take over security responsibilities from Israel at its border with the small Palestinian territory.
Last year, Israel, Egypt and the
US signed a historic deal on trade
The gas deal will be the second most important commercial venture between Egypt and Israel since last December, when the two countries signed an historic trade accord with the United States.
The accord provided for the establishment of joint industrial zones in Egypt from where goods will be exported to the US duty free.
It was the first between the two countries since their 1979 peace treaty.
Egypt's proven gas reserves stand at 1.8 trillion cubic metres but, according to analysts, could be as high as three trillion.