A 2002 UN-backed boundary demarcation was meant to settle the dispute for good, but Ethiopia refused to abide by it
Ethiopia and Eritrea signed an agreement on Sunday at a summit in Saudi Arabia, bolstering a historic peace accord between the two former Horn of Africa enemies, officials said.
Authorities did not reveal exact details of the new deal signed in Jeddah, but sources close to the Saudi government said it would help strengthen the truce and enhance security in the wider region.
Saudi King Salman hosted the signing ceremony which was also attended by his son, Crown Prince Mohammed bin Salman, and UN Secretary-General Antonio Guterres.
"The peace agreement between Ethiopia and Eritrea signed today in Jeddah is a historic event that will contribute to strengthening security and stability in the region," said Saudi Foreign Minister Adel al-Jubeir.
Ethiopia's Prime Minister Abiy Ahmed and Eritrea's President Isaias Afwerki signed a peace pact in July ending two decades of enmity sparked by a two-year border conflict which broke out in 1998.
Two land border crossings between Ethiopia and Eritrea were reopened last Tuesday for the first time in 20 years, crowning a rapid reconciliation between the former bitter enemies.
The warming of ties in the Horn of Africa has also seen Ethiopia and Eritrea re-open air links, embassies and trade routes.
Eritrea gained its independence from Ethiopia in the early 1990s, and war broke out later that decade over a border dispute.
A 2002 UN-backed boundary demarcation was meant to settle the dispute for good, but Ethiopia refused to abide by it.
A turnaround began in June when Abiy announced that Ethiopia would hand back to Eritrea the disputed areas including the flashpoint town of Badme where the first shots of the border war were fired.
'Wind of hope'
Aside from the Jeddah summit, Guterres said Saudi Arabia will also host possible talks between the presidents of Djibouti and Eritrea on Monday and Tuesday.
The two nations have been at loggerheads for decades over a long-standing border dispute.
"There is a wind of hope blowing in the Horn of Africa," Guterres said.
Saudi Arabia and its ally the United Arab Emirates are helping broker peace in the region, in a sign of the growing importance the Gulf nations put on east Africa as they battle Iran-backed Houthi rebels in Yemen.
In recent years Eritrea has strengthened ties with Saudi Arabia and the UAE, which has reportedly built a military base at the strategic southern port of Assab used in its operation in Yemen.
Dozens of commercial vessels transit daily through the Bab al-Mandeb waterway, a crucial shipping lane between the Arabian Peninsula and the Horn of Africa.
Houthi rebels have launched a number of attacks on ships during the Yemeni conflict.
"This is part of a larger Saudi-UAE strategic cooperation to bring the Horn of Africa in their orbit, especially in light of the war in Yemen," Theodore Karasik, a senior advisor at the consultancy Gulf State Analytics, told AFP.