By Jonathan Marcus
BBC diplomatic correspondent
This new agreement sets increased levels of US military aid for Israel over the coming decade.
Israel is seeking to improve the combat capabilities of its infantry
In broad terms, Israel will receive a total of some $30bn (£14.8bn) in military aid, a significant increase over $24bn (£12bn) it received over the past 10 years.
This is welcome news for Israel.
Last summer's war between Israel and the Lebanon-based Hezbollah demonstrated a complacency and lack of training within the Israel Defence Force (IDF).
Putting this right will require additional spending.
But improving the combat capabilities of Israel's infantry and armoured formations must go hand-in-hand with trying to find improved technical solutions to the threat of missile attack against Israeli population centres.
Israeli military planners must also contend with what they see as the potential long-range threat from Iran. So, there is no shortage of things to spend money on.
Israel has not got everything its own way.
Indeed, the visit of the US Undersecretary of State for Political Affairs, Nicholas Burns, was postponed earlier this month after it became clear that the US was not in a position to deliver the aid in quite the way the Israelis wanted.
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
The Israeli government would have preferred to get equal instalments each year over the 10-year period.
Instead, the aid will increase by some $150m (£76m) each year. In other words, Israel will get less of the money during the initial period of this deal than it had wanted.
The Israeli defence ministry will be able to spend a little over 25% of the military aid inside Israel itself - an important factor both in maintaining Israel's own industrial base and in maintaining its technical edge over any combination of adversaries.
Israel would probably like to have spent even more on domestically-produced weaponry but the Bush administration, mindful of pressure from America's own defence lobby, was unwilling to give more ground.
Quite apart from the boost this gives to Israel's armed forces, it also sends a powerful signal of Washington's continued support for its principal ally in the region.
Israel is Washington's principal ally in the Middle East
Israel is not the only recipient of US military largesse.
At the end of July, US Secretary of State Condoleezza Rice unveiled a series of multi-billion dollar arms deals, involving not just the Israel package, but more weaponry for Egypt, Saudi Arabia and other key Gulf allies.
This would, Ms Rice said, "bolster forces of moderation and support a broader strategy to counter the negative influences of al-Qaeda, Hezbollah, Syria and Iran".
She argued that more weaponry for Egypt and Saudi Arabia in particular would "bolster our partners' resolve in confronting the threat of radicalism and cement their respective roles as regional leaders".
'Not the solution'
Critics will argue that additional weapons sales to this troubled region will not serve the cause of peace.
Part of the reason for Israel's increased package, they say, is to maintain its edge in the face of sophisticated weapons deliveries to Egypt and Saudi Arabia.
Indeed, in the wake of the somewhat compromised policy of spreading democracy in the region - an approach which threatened to sow a good deal of chaos in the short-term - these arms deals signal a return to a more traditional US approach; arming friends so better to bolster an alliance against common enemies.
Arms sales in themselves are not the solution to the region's problems. But it is probably wrong to see them simply as part of the problem.
The Bush administration's toppling of Saddam Hussein has caused a good deal of instability way beyond Iraq's borders. It has fundamentally altered the strategic map of the region.
And with Iran in the ascendancy, many of America's allies feel vulnerable.
Addressing their concerns is a necessary part of stabilising the region.
But arms sales have to be part of an integrated approach that brings together diplomatic peace efforts and a mix of carrots and sticks to try to win over potential or actual enemies.
Many of the Bush administration's critics argue that - despite its increased efforts to engage in the peace process - it still has not got this package quite right.