The opening on Friday is being seen as a step towards Palestinian independence and a boost to Palestinian leader Mahmoud Abbas, as he faces a fierce challenge by the Muslim resistance group Hamas in the 25 January parliament elections.
"This is a great day. It is a day of happiness ... because it means an enormous step forward towards the freedom of the Palestinian people," Marc Otte, the EU representative in the Middle East, told 1200 guests attending the ceremony.
The Rafah terminal on the Gaza-Egypt had been closed by Israel as its troops withdrew from the Gaza Strip in September.
After two months of international mediation and a final push by US Secretary of State Condoleezza Rice, Israel agreed that the Palestinians would run their side of the border, with the help of European monitors.
'We are free'
The crossing will open to Palestinian travellers on Saturday morning, initially for four hours a day until the European monitors get settled. After the test period, opening hours will be expanded.
"From this moment, we feel we are free," said Fathia Najar, 55, one of a group of Palestinian travellers waiting near Rafah to cross the next day. "Before this, we lived in a jail."
Before the Israeli pullout, travel through Rafah was often difficult. The terminal was repeatedly closed on security grounds, and at times travellers waited for days to get through.
European monitors will help
Palestinians run the terminal
Heavy security ringed the terminal during Friday's ceremony, with police set up roadblocks on access roads. Police officers also lined the main north-south road from Gaza City to Rafah.
The border deal backs Abbas' message that Palestinians can only gain independence through negotiations with Israel. Hamas says such talks are pointless and that it drove Israel out of Gaza by force.
Despite the Abbas-Hamas rivalry, Hamas leader Mahmud al-Zahar attended the opening ceremony. "Our presence here does not mean we support this agreement," the Hamas leader said.
Moment of silence
The opening ceremony was held under a large tent. After Muslim prayers, guests stood for a moment of silence for Palestinians killed in fighting with Israel.
In preparation for the opening, the terminal was refurbished. It got a new coat of paint, workers replaced the ceiling tiles and installed new lighting.
Rows of blue and orange chairs filled the arrivals and departure halls, along with batteries of computers, X-ray machines, metal detectors and security cameras.
The border crossing's opening is
being seen as a boost to Abbas
The key dispute between Israel and the Palestinians had been over whether Israel should get real-time surveillance videos from Rafah and be allowed to veto the entry or departure of some passengers.
In the end, Israel dropped both demands.
Otte, the EU representative, said the operation of the terminal would be a test for renewed Israeli-Palestinian cooperation, after nearly five years of bloody fighting.
Initially, 20 EU monitors will supervise Rafah operations, said Julio Delaguardia, spokesman for the contingent.
He said the first group of monitors came from Italy, Denmark, Romania and Luxembourg. In the coming weeks, the group will grow to 70, with additional monitors from France, Spain, Portugal, Sweden and Finland.
He said he hoped all monitors would be in place within a month, to handle large crowds for an upcoming pilgrimage season to Saudi Arabia.