Iraqi Prime Minister Ibrahim Jaafari has begun the first top-level visit to Iran since the two neighbours waged an eight-year war in the 1980s.
Ibrahim Jaafari lived in exile in Iran
More than 10 ministers are accompanying Mr Jaafari to open what Iranian media have called a new chapter in ties.
They are expected to discuss security and the control of their long border.
A new friendship is blossoming between Tehran and Baghdad to the consternation of the US, still bogged down in Iraq, says the BBC's Frances Harrison.
After decades of no diplomatic relations, Iraq now has a prime minister who has spent years in exile in Iran and heads a Shia-dominated government sympathetic to its neighbour, says our Tehran correspondent.
Iraqi officials have recently apologised for Saddam Hussein's invasion of Iran.
The Iranian press says this is the biggest Iraqi delegation to visit in 40 years.
"Everything is ready for bilateral co-operation with Iraq and we are ready to sign a security agreement during the visit," said Iran's Intelligence Minister Ali Yunesi.
The two sides are likely to focus on security issues like the continued presence of the armed Iranian opposition group, the People's Mujahideen in Iraq.
"The presence of the Mujahideen Khalq organisation's members in Iraq is against national interests of both countries and Iraqi officials had promised to expel them before," Mr Yunesi said, according to the Associated Press news agency.
But the delegations are also likely to discuss economic issues such as electricity, energy and water.
Iran's transport minister has said he expects a number of agreements to be signed to link Iran's rail network to that of Iraq and Syria.
There are also plans to start Iranian flights to Baghdad and Najaf and an oil pipeline is in the offing to take crude from Basra to be refined inside Iran.
Since the fall of Saddam Hussein, a booming trade in food and other commodities has started from Iran to the predominantly Shia south of Iraq, says our Tehran correspondent.
But the Americans are uneasy, she says.
They have warned Iran not to interfere in Iraq, saying Tehran should not try to dominate certain institutions or areas of the country.
And although a million people died in the Iran-Iraq war in the 1980s, even that most sensitive issue is now being addressed, says our correspondent.
A week ago the Iraqi defence minister came to Tehran and asked for forgiveness for what Saddam Hussein had done to Iran - an unprecedented apology.