In a statement on Thursday, Alexander Downer, the Australian foreign minister, said the treaty should clear the way for a multi-billion dollar oil and gas project called Greater Sunrise to get under way.
The deal, which must be ratified by both countries' legislatures, gives East Timor a significant source of income.
It "could result in transfers of additional revenue to East Timor of as much as $4 billion over the life of the project", Downer said.
That comes on top of around $6 billion in Greater Sunrise revenues already earmarked for East Timor under a previous agreement, he said.
The treaty signed on Thursday also adds to a 90% revenue share that East Timor will receive under a previous deal covering part of the Timor Sea known as the Joint Petroleum Development Area.
"It provides over the years ahead a very important addition to the revenue stream coming to a tiny independent country and that is a very welcome thing"
Autralian prime minister
The statement did not specify how much Australia stands to gain out of the deal, but it did say the two countries would "see the equal sharing" of government revenues from the project.
John Howard, the Australian prime minister, called the treaty a "fair and just outcome".
"It provides over the years ahead a very important addition to the revenue stream coming to a tiny independent country and that is a very welcome thing," Howard told reporters in Sydney.
East Timor is regarded as Asia's poorest nation with a population of 800,000.
Ending months of acrimonious negotiations, Australia and East Timor also agreed on Thursday to shelve for 50 years a long-running dispute over the Timor Sea maritime boundary that separates them.
Australia originally sought to keep the same border it negotiated with Indonesia, which occupied East Timor from 1975 to 1999. That border comes within 150km (90 miles) of East Timor's coast in some areas, and would place most of the natural resources in the Timor Sea under Australia's control.
East Timor wanted the border drawn in the middle of the 600km (372 miles) of ocean separating the two countries, which would have placed a significant portion of the resources under Dili's control.
Australian politicians and rights activists have accused Canberra of stealing revenue from its poverty-stricken neighbour by trying to claim the Greater Sunrise field.
East Timor's Jose Ramos-Horta
called the deal a win-win solution
But Jose Ramos-Horta, East Timor's foreign minister, said the treaty was "a fair and just deal for the two sides".
"We are happy. Finally, after two or three intense years, we have this agreement," he told The Associated Press after the meeting. "This is what you call a win-win solution."
Few more steps
The dispute had threatened to derail the multi-billion dollar oil and gas project. In 2004, energy companies had shelved plans to tap the reserves after Canberra and Dili failed to resolve the border issue.
Woodside Petroleum, an Australian company, and its partners in the Greater Sunrise project, considered the richest prize in the Timor Sea, are still to decide whether they will start pumping oil and gas.
Woodside owns 33.4% of Sunrise, situated 150km (93 miles) south of East Timor's southern coast. Its partners are Conoco Phillips with 30%, Royal Dutch Shell with 26.6% and Japan's Osaka Gas with 10%.
Woodside said there would be no immediate decision on resuming work at Greater Sunrise. "The first step for us is to understand what's in the agreement," Roger Martin, the Woodside spokesman, said.
"Then Australia and East Timor must ratify the deal. So there are a few more steps along the way."