By Heba Saleh
BBC News, Cairo
Egypt is hoping the trade deal will boost its textile industry
In a sign of a thaw in relations between Egypt and Israel, the two countries have signed a trade protocol with the US, allowing Egyptian goods made in partnership with Israeli firms free access to American markets.
The protocol, signed in Cairo, will establish what are called "qualified industrial zones" in Egypt.
Products from these zones will enjoy duty free access to the US, provided that 35% of their components are the product of Israeli-Egyptian cooperation.
The US describes this as the most important economic agreement between Egypt and Israel in two decades.
The protocol establishing the zones has been stalled for years.
There has been deep sensitivity in Egypt about any form of co-operation with Israel as long as its peace process with the Palestinians remains blocked.
But in recent weeks an unusual warmth has crept into relations between the two countries.
Both exchanged prisoners earlier this month, with Egypt handing back an Israeli who has served eight years in prison after being convicted for spying.
Egyptian President Hosni Mubarak has described Israeli Prime Minister Ariel Sharon as the best chance for the Palestinians to achieve peace.
The government in Cairo now believes Mr Sharon is moving towards the centre and away from the positions of right wing groups.
It also believes the US, pressed by Europe, is now more willing to engage seriously in the search for a settlement.
But there are also pressing economic reasons for Egypt's decision to enter into the trade agreement.
It will give a huge boost to Egyptian textile exports, which are about to suffer a drop after new regulations come into force in the US at the beginning of the year.