Ethiopia and Eritrea declared their "state of war" over on Monday and agreed to open embassies, develop ports and resume flights, concrete signs of a stunning rapprochement that has swept away two decades of hostility in a matter of weeks.

The announcement promised to end of one of Africa's most intractable military stand-offs, a conflict that has destabilised the region and seen both governments funnel large parts of their budgets into security and soldiers.

"The people of our region are joined in common purpose," Ethiopia's new prime minister Abiy Ahmed said, according to a tweet from his chief of staff, after signing a pact on resuming ties with Eritrean President Isaias Afwerki.

Abiy flew to neighbouring Eritrea a day earlier and embraced Isaias on the airport runway. Thousands of Eritreans came onto the streets to cheer them and the two men danced side by side to traditional music from both countries at a dinner that evening.

Abiy came to office in April and announced reforms that have turned politics on its head in his nation of 100-million.

With the 41-year-old former intelligence officer at the helm, the ruling coalition has ended a state of emergency, released political prisoners and announced plans to partially open up the economy to foreign investors.

In his boldest move, Abiy offered last month to make peace with Eritrea, 20 years after the neighbours started a border war that killed an estimated 80 000 people. Full-blown fighting ended in 2000, but their troops have faced off across their disputed frontier ever since.

Abiy also said he would honour all the terms of a peace deal, suggesting he might be ready to settle the border row, particularly over the contested border town of Badme.

PORTS, EMBASSIES, TRADE

Both sides tweeted summaries of the agreement signed on Monday and repeated the reference to honouring the boundary decision.

"1) State of war has come to an end; 2) The two nations will forge close political, economic, social, cultural & security cooperation 3) Trade, economic & diplomatic ties will resume, 4) The boundary decision will be implemented, 5) Both nations will work on regional peace," read the Ethiopian version.

The "State of war that existed between the two countries has come to an end," Eritrea's information minister, Yemane Gebremeskel, wrote on Twitter.

He said the deal included a commitment to open embassies in Addis Ababa and Asmara and a plan to resume flights between the two capitals. He published a photo of both men sitting at a table with their flags behind them.

Ethiopia's state broadcaster said the two men had "agreed to participate in the development of ports" - potentially a huge economic boost for both countries, particularly landlocked Ethiopia which has one of Africa's fastest growing economies.

The deal would also include a resumption of phone connections, Ethiopia's foreign ministry said.

Ethiopia's dollar-denominated bonds rose to their highest in 10-weeks on Monday.

The shake-up by Abiy, a polyglot former soldier from the Oromo ethnic group, Ethiopia's largest, has won plaudits from Asmara to Washington and drawn comparisons to the 1980s 'perestroika' reforms of Soviet leader Mikhail Gorbachev.

However, it has also attracted opposition from hardliners in the Tigrayan People's Liberation Front (TPLF), the ethnic Tigrayan party that has dominated the ruling EPRDF coalition - and by association the country and economy - for nearly three decades.

Two people were killed in a grenade blast at a massive pro-Abiy rally in Addis Ababa on June 23, with the finger of blame pointed at those opposed to his reform drive.