The leaders of Fatah and Hamas, the main Palestinian factions, have signed a deal in Egypt's capital Cairo aimed at ending their four-year rift.
Palestinian Authority president and Fatah party leader Mahmoud Abbas said Palestinians had decided to "turn the black page of division for ever".
Mr Abbas and Hamas's Khaled Meshaal had not met since the expulsion of Fatah from Gaza in 2007.
That expulsion followed a surprise Hamas election victory a year earlier.
Correspondents say the recent Arab uprisings have given fresh momentum to reconciliation.
The agreement paves the way for a joint interim government ahead of national elections next year.
The Fatah-led Palestinian Authority runs parts of the West Bank, while Hamas governs the Gaza Strip. Hamas is designated a terrorist group by Israel, the US and the EU.
"We forever turn the black page of division," Mr Abbas said in his opening remarks.
"Our people have always rejected this rift. All factions will now have to show that they have learned from this difficult experience, and that they will accept a democratic government through the coming elections."
He added that Israel must now "choose between settlements and peace".
"We reject blackmail and it is no longer possible for us to accept the occupation of Palestinian land," he said.
Mr Meshaal said that the Islamist group's "only fight is with Israel" and that the dispute with Fatah was "behind us".
He said the goal was an independent Palestinian state on the West Bank and the Gaza Strip "without giving up a single inch of land".
'Blow to peace'
Israeli Prime Minister Benjamin Netanyahu, speaking during a visit to London, said the accord was a "tremendous blow to peace and a great victory for terrorism".
He added: "When... the head of the Palestinian Authority embraces Hamas, an organisation that two days ago condemned the American action against Bin Laden, praises Bin Laden to the gills as some great martyr for emulation, when he embraces this organisation that is committed to Israel's destruction, fires rockets on our cities... this is a tremendous setback for peace, and a great advance for terror."
He had urged Mr Abbas to choose peace with Israel over a reconciliation with Hamas.
The UN special co-ordinator for the Middle East peace process, Robert Serry, has been in Cairo to attend the ceremony, along with Egyptian Foreign Minister Nabil al-Arabi and Arab League chief Amr Moussa.
Correspondents say it is a first sign of how political changes in the Arab world could affect the dynamic of the Israeli-Palestinian conflict.
Former Egyptian President Hosni Mubarak had been wary of bolstering Hamas, but the new Cairo government has adopted a less hostile stance towards the Islamist group.
The BBC's Jonathan Head in Cairo says the two rival Palestinian leaders carry with them the hopes of millions of Arabs for an end to the infighting that has so weakened the Palestinian cause.
The first step after the agreement comes into effect will be to form an interim government of technocrats whose task will be to work on reconciliation and prepare for new elections.
Leading members of Hamas and Fatah will stay out of this government in the short term.
But there are deep differences yet to be resolved over whether to recognise and negotiate with Israel, and over how to share security in Gaza and the West Bank, our correspondent says.
Israel has suspended tax transfers to the Palestinian Authority, with the Israeli finance minister saying payments would be stopped until it was clear money would not go to militants in Hamas.
Meanwhile, it remains unclear whether Western powers will deal with the new government that is to emerge from the unity deal.
The Quartet of mediators - the US, the EU, the UN and Russia - has long demanded that Hamas renounce violence and recognise the principle of Israel's right to exist.
In recent months, tens of thousands of Palestinians have taken to the streets in Gaza and the West Bank to ask for political unity, amid calls for democracy elsewhere in the region.
Correspondents say that while the protests were not on the scale of those elsewhere, they clearly got the attention of Palestinian political leaders.