Pakistan and India have agreed to discuss the bitterly divisive Kashmir issue in historic talks due to start next month.
Pakistan and India have fought two wars over Kashmir
The countries' leaders are "confident" the discussions will bring peace - "History has been made," Pakistani leader Pervez Musharraf told the press.
The announcement came at the end of a South Asian regional summit in the Pakistani capital, Islamabad.
A BBC correspondent in Islamabad says it represents a major breakthrough.
The United Nations, the US and Britain have all welcomed the move, which follows a gradual thaw in relations between the two nuclear rivals after a period of prolonged military confrontation.
'Victory for the people'
"To carry the process of normalisation forward, the president of Pakistan and the prime minister of India agreed to commence the process of a composite dialogue in February 2004," said the joint statement.
It came a day after President Musharraf hosted talks with India's Atal Behari Vajpayee - their first in nearly three years.
Some details of next month's talks, including where they will be held, have still to be finalised.
But the statement expresses great hope that they will bear fruit.
"The two leaders are confident the resumption of the composite dialogue will lead to the peaceful settlement of all bilateral issues, including Jammu and Kashmir, to the satisfaction of both sides," it says.
Praise for Vajpayee
Shortly afterwards, General Musharraf said: "History has been made."
Vajpayee and Musharraf's talks on Monday paved the way
But he cautioned that the talks would be only a beginning, not an end.
Tuesday's agreement was a "victory for moderates" and he praised both India and Pakistan for showing flexibility in their bargaining position.
Mr Vajpayee's statesmanship had made Tuesday's agreement possible, General Musharraf said.
"I would like to give total credit to his vision."
The joint statement said the two leaders had discussed all issues, particularly the question of cross border violence.
It said General Musharraf had assured Mr Vajpayee that territories under the control of Pakistan would not be used for such purposes.
The statement also said the formal talks would be between the foreign secretaries of the two countries.
Monday's hour-long meeting between General Musharraf and Mr Vajpayee was the centre of attention at the South Asian Association for Regional Co-operation (Saarc) summit.
The BBC's Sanjeev Srivastava in Islamabad says both sides realise the road ahead may be tough.
But United Nations' Secretary General Kofi Annan has already praised the "statesmanship" and "wisdom" of the Indian and Pakistani leaders.
US Secretary of State Colin Powell also welcomed news of the talks, saying they opened a new opportunity for achieving peace in the region.
UK Foreign Secretary Jack Straw commended the two countries for their moves to defuse tensions.
Separatist politicians in Indian-administered Kashmir gave the announcement a cautious welcome.
However, spokesmen for the major Kashmiri militant groups have said their attacks on Indian targets will continue.
In April 2003, Mr Vajpayee made a surprise speech calling for an end to more than 18 months of simmering tensions with Pakistan, prompted by an attack on the Indian parliament.
India blamed that attack on Kashmiri separatists it said were backed by Pakistan.
A generation has grown up with militancy and the military
Pakistan denied the charge, saying it only provides diplomatic support to what it calls an indigenous insurgency against Indian rule in Kashmir.
Analysts say the rivalry between India and Pakistan has in the past halted projects within the 18-year-old Saarc grouping.
The Islamabad summit concluded with members agreeing to create a free trade zone from 1 January, 2006.
Ministers also updated a convention on combating terrorism and launched a social charter to raise living standards in member states.