Silvan Shalom, the Israeli Energy and Regional Development Minister, said the deal was a result of "strategic co-operation of diplomatic significance" between Israel, Jordan and the Palestinian Authority.
"This is a breakthrough after many years of efforts. It is nothing less than a historic move," he told Israel Radio.
But environmentalists criticised the agreement, with Friends of the Earth accusing Shalom of misleading the Israeli public by packaging it as an initiative to save the Dead Sea.
"What is being devised here is nothing to do with the Red-Dead Canal project but is a water exchange programme," said Gidon Bromberg, the Israeli director of EcoPeace/Friends of the Earth Middle East.
"It will bring foreign water into the Dead Sea that would upset its ecosystem, creating gypsum and quite probably algae."