The leaders of Egypt, Ethiopia and Sudan all gathered in Khartoum to sign the agreement of principles on Ethiopia's Grand Renaissance dam project.
"I confirm the construction of the Renaissance Dam will not cause any damage to our three states and especially to the Egyptian people," Ethiopian Prime Minister Hailemariam Desalegn said at the signing ceremony.
Egypt, heavily reliant for millennia on the Nile for agriculture and drinking water, feared that the Grand Renaissance Dam would decrease its water supply.
"We have chosen cooperation, and to trust one another for the sake of development."
He said the final accord will "achieve benefits and development for Ethiopia without harming Egypt and Sudan's interests".
Sudan's President Omar al-Bashir hailed the deal as "historic".
Ethiopia began diverting the Blue Nile in May 2013 to build the 6,000 MW dam, which will be Africa's largest when completed in 2017.
Egypt believes its "historic rights" to the Nile are guaranteed by treaties from 1929 and 1959 which grant it 87 per cent of the river's flow and the power to veto upstream projects.
In protest, Egypt withdrew from the Nile Basin Initiative (NBI), a forum to discuss management and development of the region's resources, but later resumed participation.
Neither Sudan nor Egypt has signed the 2010 Nile Basin deal, however.
Sudan, like Egypt, relies on Nile resources but has said it does not expect to be affected by Ethiopia's Grand Renaissance project.
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