US Undersecretary of State Nicholas Burns has signed a deal that will provide Israel with $30bn (£14.8bn) of military aid over the next 10 years.
Israel and the US are increasingly alarmed by Iran's growing power
The Israeli prime minister, Ehud Olmert, has said the aid will preserve his country's military advantage over other countries in the Middle East.
The new military aid package represents a 25% increase from present levels.
The US announced multi-billion-dollar arms deals with Saudi Arabia, Egypt, and other Gulf states last month.
Washington says it wants to help its allies in the Middle East meet their security needs and counter the growing power of Iran in the region.
'Investment in peace'
Mr Burns and Israeli Foreign Ministry Director-General Aharon Abramovitz signed the memorandum of understanding on the new aid package at a ceremony in Jerusalem.
It will see Washington transfer $30bn over the next decade, compared to $24bn over the past 10 years. The first payment of $2.55bn will be made in October 2008.
Mr Burns called the aid package an "investment in peace", saying "peace cannot be made without strength".
"Needless to say, given Israel's predicament, living in a region that is very violent and unstable, its military edge is of interest to our country, and we've committed to that," he said.
The money must be used to purchase military equipment from the US defence industry, although Israel will also be permitted to use 26.3% to buy equipment from local companies.
The arrangement requires Congressional approval, but Mr Burns said he thought there would be little opposition, the Associated Press news agency reported.
After arriving in Jerusalem on Wednesday evening, Mr Burns met Mr Olmert briefly.
US ARMS AID TO ISRAEL
$30bn over 10 years
1st payment of $2.55bn in 2008
Annual payments rising to $3.1bn by 2011
26.3% can be spent in Israel
Rest must be spent on US arms
Mr Olmert asked the US envoy to thank President George W Bush and the secretary of state, Condoleezza Rice, for their efforts in bringing about the accord.
"The aid agreement with the US is an important and significant component for Israel, and proves once again the depth of the relationship between the two countries and the United States' commitment to Israel's security, and to preserving its qualitative advantage over other countries in the Middle East," Mr Olmert said.
While he is in Israel, Mr Burns is also meeting Foreign Minister Tzipi Livni, Defence Minister Ehud Barak and other Israeli officials for "discussions on regional security, including the challenge posed by Iran".
The Bush administration said last month that it was offering weapons aid to other countries in the region, including $20bn for Saudi Arabia, $13bn for Egypt and $20bn to be shared between Qatar, Bahrain, Oman and the United Arab Emirates.