The deal was signed by President Pierre Nkurunziza and National Liberation Forces (FNL) rebel chief Agathon Rwasa and comes after more than a decade of exhaustive and often complicated peace talks.
It kicks off a process under which the National Liberation forces (FNL) fighters will be integrated into the armed forces.
The FNL will also be transformed into a political party as outlined in broad power-sharing deals that were endorsed last year.
The ceremony in the Tanzanian commercial capital Dar es Salaam was also attended by other African leaders including Thabo Mbeki, the president of South Africa whose country is mediating the negotiations.
"This should now be the end of many years of suffering for the people of Burundi. The war was long and it resulted in many, many deaths and created thousands of refugees," said Tanzanian President Jakaya Kikwete.
"I thank the people of Burundi for the perseverence in reaching this moment. We should now work to sustain peace, reconcile and reconstruct your country," said Mr Mbeki.
"I wish war would become a taboo in Burundi as well as in other parts of Africa," said Ugandan President Yoweri Museveni urging the Burundians to steer their country towards democracy.
Power share
Mr Nkurunziza, a former Hutu rebel leader himself, came to power last year after a series of elections that followed the adoption of the new power-sharing constitution.
"Our brothers and sisters of the FNL should know that thay have a government committed to peace in Burundi, reconstruction and reconciliation," he said.
"We welcome you (to the government) and be reassured that we are ready to work together (and) live together in the same plains of Bujumbura so that the people in Burundi can witness that we are serious with peace and interest of their country," he said.
Mr Rwasa said his movement's delay in signing the agreement was "misunderstood".
"What we needed was complete peace and democracy, but today we are convinced that we are moving towards that direction. We are asking for continued support to ensure full implementing of these agreements," Mr Rwasa said.
Internal dissent
The peace deal comes as the government is rocked by internal dissent and under fire for a crackdown against an alleged, ill-defined coup plot.
It has resulted in the detention of a string of high-profile figures, including former president Domitien Ndayizeye and former vice president Alphonse-Marie Kadege.
The FNL had refused to recognise Mr Nkurunziza's government and carried on fighting but earlier this year said it was ready to talk peace.
The South African-mediated negotiations began in Dar es Salaam in June and resulted in the signing of a provisional truce on June 18 with the two sides vowing to sign a permanent ceasefire within two weeks.
That deadline has been repeatedly missed amid mutual accusations of violations and political turmoil in Bujumbura, where the government had been distracted by the alleged coup plot and criticism over rampant corruption and human rights abuses.