The Albanian majority has refused to attend Serbian educational institutions since 1991 because lectures were not conducted in the Albanian language.
The agreement is the first sign of compromise between the two sides since Serbian police initiated a security operation against Kosovo Albanian separatists earlier this month. At least 80 people died in the action.
"This first step is very significant because it represents the defeat of separatism which thrived on education," said Ratomir Vico, the Serbian minister in charge of relations with Kosovo.
He signed the deal with Fehmi Agani, a senior adviser to LDK, the biggest Kosovo Albanian party.
Local Serbs protest
But local Serb hard-liners and educators disagreed. They say the agreement will eventually lead to Albanian-controlled education and force them to leave the province, which has major historical significance.
"Today's signature means the break-up of the Serbian state," Pristina University Rector Radivoje Papovic told thousands of Serb students and citizens assembled on the campus in the regional capital.
The agreement, brokered by an Italian religious organisation, allows for a phased return by the Albanians to the University of Pristina by the end of June.
It is proposed that the campus will operate in double shifts - Serbs will go to schools in the morning and Albanians in the afternoon. In the next term they will switch shifts.
The agreement met only one of the Albanian community's demands but it was hailed by Western powers as a concrete sign of progress in the province.
The six-nation Contact Group on former Yugoslavia will meet on Wednesday to decide whether to impose sanctions on Belgrade because of its repression of Albanian separatists in Kosovo.
Poll results
Meanwhile, Albanian radio said Kosovo's Albanians re-elected Ibrahim Rugova as president of what they call the Republic of Kosovo, in presidential and parliamentary elections which the Serbian authorities did not recognise.
The radio said Mr Rugova, who heads the largest Albanian party, the Democratic League of Kosovo (LDK) and was unopposed in the presidential election, received 99 per cent of the vote.
Kosovo: Key facts and background
(03 Mar 98 | Special Report)
Albanians vote in 'illegal' Kosovo elections
(22 Mar 98 | Special Report)
Kosovo: History of a troubled region
(09 Mar 98 | Special Report)
Kosovo: Chronology of recent events
(09 Mar 98 | Special Report)
Albanian home page
Kosovo: Why the Serbs care
Mediators' home page
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