"The Political Agreement between President Ghani and Dr. Abdullah Abdullah has just been signed," spokesman Sediq Sediqqi said on Twitter, adding that Abdullah would lead the council for peace talks and his team members would be included in cabinet, Reuters reported.
Abdullah had disputed the results of September's presidential election. Earlier this year, he announced the formation of a parallel government, undermining Ghani's administration while the United States was in peace talks with the Taliban.
Washington, frustrated by the growing impasse between the two men, even after Secretary of State Mike Pompeo travelled to Kabul to mediate, threatened a $1 billion aid cut if the men could not agree.
It was not immediately clear whether the agreement, would result in aid being reinstated, but it comes as Afghanistan faces growing fiscal pressures, with tax revenues falling and foreign aid pledges due this year expected to shrink.
Officials say that a deal between the Ghani and Abdullah is crucial to launching peace talks, as Abdullah's camp represents much of the country's north-west.