The dispute blew up when Australia, which headed a peacekeeping force that played a key role in East Timor's independence from Indonesia in 2002, insisted that a 1970s sea boundary agreed with Jakarta should remain in place.
That boundary gives Canberra two-thirds of the sea area and most of its energy resources, estimated to be worth $32bn, including 80% of the large Greater Sunrise field.
"This is a deal which is a good one for both Australia and East Timor," Foreign Minister Alexander Downer told parliament on Thursday.
"It safeguards Australian sovereign interests and it will provide investors with the certainty needed for large-scale resource projects to go ahead."
East Timorese Prime Minister Mari Alkatiri and Foreign Minister Jose Ramos Horta have agreed that a formal signing ceremony will take place by mid-January, Downer said.
Details of the agreement will not be released until then, he added.
Under the deal, according to earlier reports, Australia's tiny northern neighbour would receive a larger share of revenues from the Greater Sunrise oil and gas field in return for dropping the boundary dispute.
"This is a deal which is a good one for both Australia and East Timor"
Australian foreign minister
Downer said East Timor will continue to receive a 90% share of revenues from the previously agreed Joint Petroleum Development Area, which he said could provide more than $14.5bn to the impoverished nation over 10 years.
Dili had earlier said the resources revenue was the tiny country's only chance of ending its dependence on foreign aid and accused Australia of trying to cut its financial lifeline.
Oil companies had threatened to scrap Timor Sea projects if the two governments did not end their squabbling over the resources revenue, saying their clients were uncomfortable at the failure to resolve major issues.