Their campaign against female education has led to tens of thousands of children being denied an education, our correspondent says.
US envoy to Pakistan and Afghanistan Richard Holbrooke, who is in India, said he needed more information on the deal but that the situation in Swat had "deeply affected the people of Pakistan, not just in Peshawar but in Lahore and in Islamabad".
Mr Holbrooke said Swat "demonstrates a key point and that is that India, the United States and Pakistan have all a common threat now... [we] all face an enemy which possesses a direct threat to our leadership".
The government of North West Frontier Province had been holding talks with local militant leader, Sufi Mohammad, on making amendments to the enforcement of Sharia in Swat.
Sufi Mohammad, a pro-Taleban cleric, is the father-in-law of Maulana Fazlullah, who has been waging a violent campaign to impose Sharia in the region.
Mr Hoti said: "An agreement has been reached with Sufi Mohammad's delegation and this is a great
"The recommendations and proposals have been finalised, but they can only be implemented after peace is achieved."
Mr Hoti said President Asif Ali Zardari had "in principle... approved this package".
Mr Hoti said the agreement had not been made "under pressure from anyone" and was not unconstitutional.
"It was reached after realisation that it was the demand of the people."
The chief minister said the government had done all it could and asked for the Taleban to now lay down their arms.
He said a grand jirga (council) led by Sufi Mohammad would now be going to Swat to get all the factions to comply.
The Taleban have said they will examine the document before ending hostilities permanently.
The Agence France-Presse news agency quoted Sufi Mohammad as saying: "We had been holding negotiations with the government on a 22-point charter of demands for quite some time. There were differences on five points, which were removed in a meeting on Sunday."
Many people have fled Swat to be in safer parts of Pakistan
Sharia law has been in force in Malakand since 1994. But appeal cases are heard in the Peshawar high court, which operates under the civil code.
Our correspondent says there will be alterations to the appeals process - a point of contention often cited by the militants for their continued insurgency.
The agreement will bind the provincial government to implement Sharia law in the Malakand division, which comprises Swat and its adjoining areas.
The people of Swat have been caught in the crossfire between the army and the Taleban, our correspondent says.
More than 1,000 civilians have died in shelling by the army or from beheadings sanctioned by the Taleban. Thousands more have been displaced.
The Taleban now control the entire countryside of Swat, limiting army control to parts of the valley's capital, Mingora.
Many people in Swat now would favour an early exit by the army as they have failed to roll back the Taleban or protect the Taleban's opponents, says our correspondent.
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