Yusuf fell out with Prime Minister Nur Hassan Hussein earlier this month after Hussein sacked Mogadishu's powerful mayor, who was a key ally of the president.

Both men have been locked in crisis talks for days with officials in neighbouring Ethiopia.

"We hope the agreement will end the differences between the Somali leaders," Ethiopia's Foreign Minister Seyoum Mesfin said after the pair signed the deal in Addis Ababa.

"Ten days ago, the very existence of TFG (transitional federal government) was at a critical point. The differences were a deciding factor that makes or breaks the transitional period, including the peace agreement in Djibouti."

Addis Ababa has propped up Yusuf's government since allied Ethiopian and Somalia troops stormed into Mogadishu over the New Year of 2007 and retook the capital from an Islamist movement.

The rebels have waged relentless Iraqi-style attacks against government positions since then in violence that has killed more than 8,000 and forced another 1 million from their homes.

Despite the rift between Yusuf and Hussein, the government did sign a tentative peace agreement with a faction of the rebel Islamists at U.N.-led talks in Djibouti last week.

But that pact has only served to stoke violence led by another faction of the opposition, whose fighters seized the strategic southern port of Kismayu on Friday.