Israel has apologised to Turkey for killing nine Turkish citizens in a 2010 naval raid on a Gaza-bound flotilla.
The two have agreed to normalise relations in a surprise breakthrough announced by US President Barack Obama.
The rapprochement could help regional coordination to contain spillover from the Syrian civil war and ease Israel's diplomatic isolation in the Middle East.
In a statement released by the White House minutes before Mr Obama ended a visit to Israel, the president said Prime Minister Benjamin Netanyahu and his Turkish counterpart Tayyip Erodgan had 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," Mr Obama said.
The first conversation between the two leaders since 2011 gave Mr Obama a diplomatic triumph in his visit to Israel and the Palestinian Territories.
The 30-minute call was made in a runway trailer at Tel Aviv airport, before the president boarded Air Force One for a flight to Jordan.
Israel bowed to a long-standing demand by Ankara, once a close strategic partner, to apologise formally for the deaths aboard the Turkish Mavi Marmara vessel.
The vessel was boarded by Israeli marines who intercepted a flotilla challenging Israel's naval blockade of Gaza.
"Prime Minister Netanyahu expressed an apology to the Turkish people for any error that may have led to the loss of life, and agreed to complete the agreement for compensation," an official Israeli statement said.
Mr Netanyahu and Mr Erdogan "agreed to restore normalisation between the two countries, including returning their ambassadors (to their posts)," the statement added.
A US official said "Erdogan accepted the apology on behalf of Turkey".
Turkey expelled Israel's ambassador and froze military cooperation after a UN report into the Mavi Marmara incident, released in September 2011, largely exonerated the Jewish state.
Israel had previously balked at apologising to the Turks, saying this would be tantamount to admitting moral culpability and would invite lawsuits against its troops.
The Jewish state has offered to pay into what it called a "humanitarian fund" through which casualties and their relatives could be compensated.
A source in Mr Netanyahu's office said opening a new chapter with Turkey "can be very, very important for the future, regarding what happens with Syria but not just what happens with Syria".
Before the diplomatic break, Israeli pilots trained in Turkish skies, exercises widely seen as improving their capability to carry out long-range missions such as possible strikes against Iran's nuclear facilities.