The leader made the statement in parliament, three months after the group declared a permanent ceasefire.
"The government is going to start negotiations with ETA, while maintaining the irrevocable principle that political questions are only resolved with the legitimate representatives of the popular will," he said.
Mr Zapatero said the time is right for dialogue, however warned that it will be "a long, hard and difficult" process.
No date was given about when the process might start, and the prime minister said his government would not compromise its core principles.
"We will approach it with determination and caution, unity and detachment, and always, always, with respect to the memory of the victims," he said.
ETA's armed campaign is blamed for more than 800 deaths over 30 years.
Statement welcomed
Mr Zapotero's comments were welcomed by ETA's banned political wing Batasuna, the Basque regional government and the European Union, but Spain's opposition Popular Party refused its support, saying there could be no talks with a "terrorist".
In Brussels, European Commission chief Jose Manuel Barroso said he shares the hopes "of all those who look to a future in which Spain is free from the scourge of terrorism."
Batasuna leader Pernando Barrena hailed the announcement, as did the Basque regional government.
The Popular Party recently broke off cooperation with the government after the Basque branch of the ruling Socialist party said it would pursue talks with Batasuna, and leader Mariano Rajoy said any political discussion with a terrorist government is unacceptable.
The Association of Victims of Terrorism, the main victims' group, has vowed to pursue a "civic resistance" campaign. In recent years such action has drawn several hundred thousand Spaniards onto the streets to demonstrate against talks.
Mr Zapatero said he was acting under a parliamentary resolution passed in May last year authorising dialogue with ETA as soon as it abandoned violence, which it promised to do in a ceasefire declaration in March this year.
He said he trusts ETA to keep its word, and noted that it was the first time in its 38-year armed struggle that it had declared a permanent truce and that it had been three years since its last deadly attack, in May 2003.
The leader said contacts with the ETA leadership would take place discreetly, firstly essentially on matters of procedure and timetable before focusing on disarmament and the fate of ETA members held in Spanish jails.
ETA, which stands for Basque country and Freedom, has been trying to carve out independence for Euskal Herria, a northern region bordering the Atlantic Ocean and straddling the Franco-Spanish border.
Possibly the group’s most spectacular attack was on December 20, 1973 which killed Admiral Luis Carrero Blanco, the head of government and expected successor to then dictator Francisco Franco.
Mr Zapatero had made the Basque question one of his government priorities when he took power in April 2004.