Israel and the United Arab Emirates have struck a historic deal to normalise relations, which has been hailed as a step towards peace in the volatile Middle East.

Under the surprise agreement, which US President Donald Trump announced on Friday morning (Australian time), Israel also promised to “suspend” plans to annex Palestinian lands in the occupied West Bank.

Mr Trump said the US-brokered deal was “a truly historic moment” and has granted him a rare diplomatic win ahead of the November election.

It would enable the two countries to sign bilateral agreements on investment, tourism, direct flights, security, telecommunications and other issues.

“Now that the ice has been broken I expect more Arab and Muslim countries will follow the United Arab Emirates,” Mr Trump said.

“Everybody said this would be impossible.

“After 49 years, Israel and the United Arab Emirates will fully normalise their diplomatic relations.”

Tel Aviv City Hall was lit up with the flags of the UAE and Israel after the announcement. Photo: AAP

The agreement will be known as the Abraham Accord and Mr Trump joked: “I wanted it to be called the Donald J. Trump Accord but I didn’t think the press would understand that.”

White House officials said discussions about forging the deal accelerated recently after lengthy talks between Israel, the UAE and the US.

The deal was sealed in a phone call between Mr Trump, Israeli Prime Minister Benjamin Netanyahu and Abu Dhabi’s Crown Prince Sheikh Mohammed Bin Zayed.

“HUGE breakthrough today! Historic Peace Agreement between our two GREAT friends, Israel and the United Arab Emirates,” Mr Trump wrote on Twitter.

Tweet from @realDonaldTrump

Delegations from the two Middle Eastern nations are expected to meet in the coming weeks to sign deals on direct flights, security, telecommunications, energy, tourism and health care.

The two countries will also unite to fight the coronavirus pandemic, according to a joint statement from the US, the UAE and Israel.

The agreement promises a “full normalisation of relations” to “transform the region by spurring economic growth, enhancing technological innovation and forging closer people-to-people relations”, the statement read. 

Tweet from @realDonaldTrump

However senior Palestinian official Hanan Ashrawi slammed the deal, saying it perpetuated Israel’s occupation of the West Bank.

“Israel got rewarded for not declaring openly what it’s been doing to Palestine illegally & persistently since the beginning of the occupation,” she wrote on Twitter.

She also said the UAE had come forward with its “secret dealings/normalisation with Israel”.

“Please don’t do us a favour. We are nobody’s fig leaf!” she wrote.

Tweet from @DrHananAshrawi

For Israel, the announcement comes after years of boasting by Mr Netanyahu that his government has closer ties to Arab nations than publicly acknowledged.

For the UAE, it further burnishes its international campaign to be seen as a beacon of tolerance in the Middle East, despite being governed by autocratic rulers. It also puts the UAE out first in a regional recognition race among neighbouring Gulf Arab states.

-with AAP