Prime Minister Girija Prasad Koirala and Maoist rebel leader Prachanda signed the deal in a crowded convention hall in the capital Kathmandu.
After torturous negotiations, both parties agreed to a transitional government and United Nations monitoring.
Under the agreement, the rebels are to join the interim parliament by Nov. 26. An interim government including the rebels is to be in place by Dec. 1, according to the Associated Press.
"This ends the more than one decade of civil war in the country," Prachanda said at the signing ceremony, according to the BBC. It also "marks the end of the 238-year-old feudal system," he added.
The move comes six months after mass protests forced King Gyanendra to restore parliament and end direct rule.
Gyanendra became king in 2001 following a national tragedy in which the 29-year-old Crown Prince Dipendra gunned down his parents at a family dinner in a drug-fuelled rage before killing himself.
In February 2005, Gyanendra dissolved parliament and took direct control, saying he needed extra powers to squelch the Maoist insurgency.
However in April 2006, tens of thousands of people rallied in the streets daily, paralyzing the country. The demonstrations were supported by the Maoists and organized by an alliance of opposition parties that now make up the interim government. At least 19 people were killed and hundreds injured in the clashes between security forces and protesters, according to the AP.
Nepalese Prime Minister Koirala said this historic and hard-wrought agreement with the Maoists "has ended the politics of killings, violence and terror and started the politics of cooperation."
"Now we need to meet together in cooperation and understanding to make sure this agreement is fully implemented," the 85-year-old premier said.
The accord comes a day after a government commission blamed Gyanendra for April's brutal crackdown and suggested that the constitution be changed to allow criminal charges against the king, the AP reported.
The new government must now work to improve the desperate situation in the rural areas -- over a third of Nepal's 28 million people live in poverty -- which supported the Maoist movement.
Rebel leaders had said their aim was to destroy government institutions and install a peasant regime, but it is not clear what they will do now that they are part of the government.
Centrist parties favor a constitutional monarchy with a ceremonial role for the king.
In Afghanistan Plan, Exit Strategy Remains a Sticking Point