Ethiopian Prime Minister Abiy Ahmed and Eritrean President Isaia Afwerki made the announcement during a landmark meeting in the latter’s capital Asmara.
It is the first time the leaders from the two East African neighbours have met in almost 20 years.
Relations were severed following a border dispute which killed tens of thousands of people in the late 1990s.
A peace deal was signed in December 2000. However, Ethiopia refused to accept the final ruling of a border commission two years later, which awarded disputed territory to Eritrea, including the town of Badme.
The countries have been on a war footing ever since.