President Armando Guebuza and Mozambican rebel Renamo leader Afonso Dhlakama, who came out of hiding Thursday, signed the deal in front of around 100 diplomats and dignitaries, an AFP reporter witnessed.
The two leaders embraced prompting jubilant cries and clapping from those gathered.
For two years government forces and fighters loyal to Dhlakama have clashed, with the rebel leader accusing the state of reneging on a peace deal that ended Mozambique’s brutal civil war.
Around one million died as a result of the 15-year conflict, which ended in 1992.
In the recent clashes Dhlakama’s supporters attacked buses and cars on the main north-south highway and government forces raided his bush hide out, in a low-level but deadly insurgency.
Dhlakama came out of hiding Thursday, returning to Maputo in a symbolic end to the two-year conflict, which had spooked investors.
On Friday he hailed the deal as an “important step forward,” but also accused the government of “intolerance”.
“After the beautiful dream of two decades ago when peace seemed to be for always, we saw a systematic concentration of power in the hands of those in power… many are in this room,” Dhlakama said drawing gasps and mutters from the audience.
He added that he “hoped today’s accord can bring to an end the one party state”.
Mozambique has been ruled by civil war victors Frelimo since independence.
The party is expected to handily win upcoming elections in October.
There were fears that the polls could be marred by violence.
Dhlakama has lost every presidential election since 1994 and his Renamo party is struggling to retain its status as the biggest opposition party.
The peace deal is to see Renamo fighters integrated into the military and the party given a greater say in election oversight bodies.
Dhlakama has also asked for a slice of the country’s growing natural resource wealth.