Palestinian leader Mahmoud Abbas and Israeli Prime Minister Ariel Sharon have declared a truce to end four years of Middle East violence.
The summit began with smiles and handshakes
Mr Abbas said the ceasefire, which begins immediately, would lead to a "new era of peace and hope".
Mr Sharon vowed to cease military action against Palestinian targets after militant groups halted violence.
In response, US Secretary of State Condoleezza Rice said it was the best chance for peace in years.
Mr Sharon and Mr Abbas did not sign a formal ceasefire deal. Their talks were wide-ranging and also included agreements on the release of Palestinian prisoners and the handover of five West Bank towns to Palestinian control.
The meeting in the Egyptian resort of Sharm al-Sheikh was the highest-level discussion between the two sides since the Palestinian intifada (uprising) began more than four years ago.
Israeli officials said after the summit that Mr Sharon had invited Mr Abbas to his farm in southern Israel.
Speaking in Paris, the US secretary of state welcomed the truce.
"Success is not assured, but America is resolute," said Ms Rice.
"This is the best chance for peace we are likely to see for some years to come - and we are acting to help Israelis and Palestinians seize this chance."
The BBC's Heba Saleh in Sharm al-Sheikh says Mr Abbas so far seems to have secured an informal truce by Palestinian factions, but it is not clear whether they will accept the Israeli offer.
The Hamas militant group gave a lukewarm reaction to the summit, with its representative in Lebanon, Osama Hamdan, saying the ceasefire declarations were "not binding" on its members.
Mr Hamdan told the Associated Press news agency that Mr Abbas had taken a "unilateral stand" that was "not the result of the outcome of an intra-Palestinian dialogue".
TV pictures showed Mr Abbas and Mr Sharon smiling as they shook hands across a table at the talks.
"We have agreed on halting all violent actions against Palestinians and Israelis, wherever they are," Mr Abbas said.
3,225 Palestinians killed by Israelis (3,135 by military in the occupied territories, 54 by military inside Israel, 34 by settlers in the occupied territories)
950 Israeli killed by Palestinians (431 inside Israel, 218 settlers, 218 soldiers on duty in the occupied territories
"The calm which will prevail in our lands starting from today is the beginning of a new era."
Mr Sharon said: "For the first time in a long time, there is hope in our region for a better future for us and our grandchildren."
He said Israel had made some painful sacrifices for the Palestinians.
"To our Palestinian neighbours, I would like to promise that we have a genuine intention for you to live in independence. We do not want to control your lives," he said.
Mr Sharon also said the two sides had agreed on transferring "certain Palestinian areas" from Israeli to Palestinian control.
Under the arrangement, Israel will withdraw its troops from Jericho and four West Bank towns within three weeks, Palestinian negotiator Hassan Abu Libdeh said later.
Agreement was also reached on the release of Palestinian prisoners, officials from both sides said. A batch of 500 would be freed soon, with another 400 to follow later, they said.
Envoys to return
The talks were also attended by Egyptian President Hosni Mubarak, who hosted the summit, and Jordan's King Abdullah.
Mr Mubarak hailed the "positive spirit" of the meeting, saying: "The task is very great, but our hopes are greater."
Egyptian Foreign Minister Ahmed Aboul Gheit told reporters at the summit that Egypt and Jordan would soon be returning their ambassadors to Israel after a four-year absence.
Mr Sharon had refused to meet the previous Palestinian leader Yasser Arafat, saying he was an obstacle to peace.
But since Arafat's death and the election of Mr Abbas as president of the Palestinian Authority, the Israelis believe they have a partner they can do business with, says BBC World Affairs Correspondent Paul Welsh.