The Fatah party of Palestinian Authority President Mahmoud Abbas and Hamas, which governs Gaza, have agreed a reconciliation deal, officials say.
Under the Egyptian-brokered deal, an interim government will be formed and a date fixed for elections.
The groups have been divided for more than four years, with Hamas in power in Gaza and Fatah running the West Bank.
Israel immediately said that the Palestinian Authority could not have peace with both Hamas and Israel.
Israeli Prime Minister Benjamin Netanyahu said: "I hope the Palestinian Authority will make the right choice - peace with Israel."
Hamas has carried out bombings and rocket attacks against Israel for years and does not recognise its right to exist.
The US responded to the news by saying that any Palestinian unity government would have to renounce violence and recognise Israel.
Thousands of Palestinians protested in Gaza this month, calling for reconciliation.
The protests were inspired by uprisings elsewhere in the Middle East and North Africa.
The split between Fatah and Hamas occurred when violence erupted a year after Hamas won Palestinian elections in 2006. Hamas seized control of Gaza in 2007.
The BBC's Jonathan Head in Cairo says that if the deal goes ahead, it will end the bitter hostility between the two sides and remove a significant barrier to the Palestinian campaign for statehood.
But he says there are many difficult issues to resolve - such as how the two factions will share security, how Gaza and the West Bank, separated by Israeli territory, will be governed, and whether the international donors will be willing to recognise Hamas.
At a news conference in Cairo, Fatah delegation head Azzam al-Ahmad said: "We are proud that we now possess the national will to end our divisions so we can end the occupation of Palestine... the last occupation in history."
Hamas's deputy leader, Moussa Abu Marzouk, said: "Our rift gave the occupation a chance. Today we turn a new page."
Mr Ahmad rejected Mr Netanyahu's opposition to the deal, saying: "[Mr Abbas] has said we want Hamas, Hamas is part of the Palestinian national fabric."
Hamas spokesman Tahir al-Nounou said Israel was "not concerned with Palestinian reconciliation and has been an impediment to it in the past".
He said: "The final signing will be in a week from now. Cairo will invite Mahmoud Abbas and [Hamas leader] Khaled Meshaal, and representatives from all Palestinian factions, to attend the signing."
Mr Ahmad said: "We have agreed to form a government composed of independent figures that would start preparing for presidential and parliamentary elections.
"Elections would be held in about eight months from now," he said.
Fatah and Hamas had been close to a deal last year but Hamas withdrew, saying the terms had been revised without its agreement. Mr Abbas has since been pushing for reconciliation.
The BBC's Wyre Davies in Jerusalem says the Netanyahu government has repeatedly said it will not sit down and talk about a two-state solution if Hamas is any way involved.
Mr Netanyahu told the Palestinian Authority on Tuesday: "There cannot be peace with both [Israel and Hamas] because Hamas wants to destroy Israel and says so openly. It shoots missiles at our cities, it fires anti-tank missiles at our children.
"I think that the idea of reconciliation shows the weakness of the Palestinian Authority and raises the question whether Hamas will take over Judea and Samaria [the West Bank] as it has taken over the Gaza Strip."
US National Security Council spokesman Tommy Vietor said: "The United States supports Palestinian reconciliation on terms which promote the cause of peace.
"Hamas, however, is a terrorist organisation which targets civilians. To play a constructive role in achieving peace, any Palestinian government must... renounce violence, abide by past agreements, and recognise Israel's right to exist."
Violence between Israel and militant groups in Gaza escalated this March following a rocket attack on an Israeli school bus that killed a teenage boy.
Israel also launched a full-scale ground operation - named Cast Lead - in the Gaza Strip that began in December 2008 and ended in January 2009.