Israel's prime minister has apologised to Turkey for "any errors that could have led to loss of life" during the 2010 commando raid on an aid flotilla that tried to breach the Gaza blockade.
Benjamin Netanyahu also agreed with his Turkish counterpart Recep Tayyip Erdogan to compensate the families of the nine activists who were killed.
Mr Netanyahu had previously only expressed regret for the deaths.
The deal was brokered by US President Barack Obama during a visit to Israel.
Before departing for Jordan on Friday afternoon, Mr Obama revealed that Mr Netanyahu and Mr Erdogan had just spoken by telephone.
"The United States deeply values our close partnerships with both Turkey and Israel, and we attach great importance to the restoration of positive relations between them in order to advance regional peace and security," the president said in a statement released by the White House.
Nine people were killed on board the Turkish aid ship, Mavi Marmara, when it was boarded by Israeli commandos while trying to transport aid supplies to Gaza in May 2010 in spite of an Israeli naval blockade.
The Israeli government admitted mistakes were made in intelligence-gathering and planning, but insisted its commandos used lethal force because activists had attacked them.
The activists said the troops had opened fire as soon as they boarded the vessel, which was in international waters at the time.
The incident provoked an international outcry and led to a major deterioration in relations between Turkey and Israel.
A statement issued by Mr Netanyahu's office on Friday afternoon said that in the telephone conversation with Mr Erdogan he had expressed regret over the deterioration in bilateral ties and noted his "commitment to working out the disagreements in order to advance peace and regional stability".
"The prime minister made it clear that the tragic results regarding the Mavi Marmara were unintentional and that Israel expresses regret over injuries and loss of life," it added.
"In light of the Israeli investigation into the incident, which pointed out several operational errors, Prime Minister Netanyahu apologised to the Turkish people for any errors that could have led to loss of life and agreed to complete the agreement on compensation."
The two leaders had also agreed to continue to work on improving the humanitarian situation in the Palestinian Territories, the statement said.
US officials told reporters that Mr Erdogan had accepted the apology. In the past, he has always given two conditions for restoring bilateral relations with Israel - an apology and compensation for victims' families.
The BBC's Kevin Connolly in Jerusalem says Mr Netanyahu's change of heart is a clear indication of the diplomatic clout that the US still wields with its two key allies in a turbulent region.
The prime minister's call to his Turkish counterpart was apparently made from a trailer at Tel Aviv airport while Air Force One sat on the ground waiting to depart.
The unglamorous setting and the last-minute nature of the call suggests the deal may not have been easy to broker, our correspondent adds.