Egypt and Saudi Arabia agreed to maritime borders that handed ownership of the islands of Tiran and Sanafir over to Riyadh, an Egyptian cabinet statement said on Saturday.
"This enables both countries to benefit from the exclusive economic zone for each, with whatever resources and treasures they contain," the statement said.
The border delimitation agreement will be submitted to parliament for ratification.
The two countries delineated their sea border for the first time in 2010 and spent the next five years claiming ownership of the two uninhabited islands.
In December 2015, Cairo and Riyadh finally agreed that Tiran and Sanafir were within Saudi territorial waters.
The islands, which once-formed the border between the Ottoman Empire and British-controlled Egypt, are considered of strategic importance because they lie on the important sea route to the Jordanian port of Aqaba and the Israeli port of Eilat.