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.
However, Egypt's President Abdel Fattah al-Sisi said on Monday that "this is a framework agreement and it will be completed".
"We have chosen cooperation, and to trust one another for the sake of development."
Sisi 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".
The agreement is made up of 10 principles, Egypt's Water Resources Minister Hussam al-Maghazi told AFP.
The countries agreed on the "fair use of waters and not to damage the interests of other states by using the waters".
They also agreed to establish "a mechanism for solving disputes as they occur", Maghazi said.
He gave no details as to when the final agreement would be signed.
Sudan's deputy water resources minister, Saif al-Din Hamed, said the signing of the agreement "will not stop the current construction and building" of the dam in Ethiopia.
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- Africa's largest dam -
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.
Ethiopian officials have said the project to construct the 1,780-metre-long and 145-metre high dam will cost more than $4 billion.
Before the agreement, the dam sparked a dispute between Ethiopia and Egypt, which use the river in different ways.
"For Egypt, the Nile is its only water supply and thus underpins the very existence of the country, providing water for its cities, industries and farms, as well as generating hydropower," said Dale Whittington of the University of North Carolina at Chapel Hill.
Whereas for Addis Ababa, "it provides the opportunity to develop financially attractive hydropower projects to fuel its economic development," the professor of environmental sciences and engineering said.
Ethiopia had said that the project would not adversely affect Egypt's share of the precious waters, but its plans still raised tensions with Cairo.
Bashir said at the ceremony on Monday that the preliminary deal would "reflect positively on the security" of the region.
Sudan, Ethiopia and Egypt's foreign ministers agreed to the basis of the deal signed on Monday after hours of talks in Khartoum.
Egypt believes its "historic rights" to the Nile are guaranteed by treaties from 1929 and 1959 which grant it 87 percent of the river's flow and the power to veto upstream projects.
But Nile Basin countries, including Ethiopia, signed another deal in 2010 allowing them to work on river projects without Cairo's agreement.
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.