The agreement came after hours of often-heated debate in Sirte
African Union (AU) members have agreed a plan to give its executive arm enhanced powers to co-ordinate common-interest policies, officials say.
But the African Authority will not be able to act internationally unless it has a mandate from heads of state.
The compromise on the draft came after hours of heated debate in a closed session in the Libyan town of Sirte.
Correspondents say its creation is regarded as a stepping stone towards a federal government for the continent.
This is of the ambition of Libyan leader Muammar Gaddafi, who wants a United States of Africa.
The African Authority proposal had been resisted by South Africa and Nigeria, among others, who objected to giving the body too much power.
It aims to simplify the AU's structure, allowing more control over diplomatic, trade and defence matters.
The African Authority will "represent the common interests of the member states of the union and speak in their name in international forums on international trade", Reuters news agency quoted the draft agreement as saying.
The structure will create a president, a vice-president, and a secretary of peace and security and common defence. Other secretaries will replace the current union's commissioners.
But the BBC's Rana Jawad in Sirte says the powers of the Authority focus on co-ordination rather than unilateral implementation.
While it will co-ordinate key policies, it will only be able to act with the consent of members, rather than exercising power over them.
Benin's Foreign Minister Jean-Marie Ehouzou said the final text "reflects everybody's position".
"The states are ready to cede a little bit a part of their sovereignty for the benefit of the [union]," he said.
Libyan leader Muammar Gaddafi, also the current AU chairman, had pushed hard for the grouping to be given wider regional and defence powers.
But supporters of Col Gaddafi's proposal faced opposition from the continent's largest economy, South Africa, and oil-producing nations like Angola and Nigeria.
They were concerned about losing sovereignty over their own defence and foreign policy issues.
One Libyan diplomat criticised the limits placed on the Authority by the final agreement.
"They have introduced the concept of a union government, but the Authority was not meant for that," he said.
"It was meant to be an inter-governmental organisation."
The changes to the AU have yet to be ratified by member states, who have also agreed to discuss the financing of the plan at a later date.