The headquarters of the new Mediterranean Union will be located in the city of Barcelona in Spain.
The decision was announced at a meeting of foreign ministers from the organisation’s 43 member nations.
The ministers have also agreed that Israel and the Arab League will take part side-by-side, at all levels of the union.
The decision ended a four-month deadlock on the two contentious issues.
The Union, which includes states in the middle east and northern Africa, has an ambitious agenda for the region.
French Foreign Minister Bernard Kouchner said: “There are projects for economic partnership and energy. There are plans for solar power, that I’ve already spoken about. There are projects for transport, agriculture, urban development, water and the environment. I would love to list all of the projects but there are so many of them. There are very detailed projects that are being worked on at the moment and that will be worked on by the Secretariat.”
A diplomat said members have agreed to back the appointment of a Secretary-General from the mainly Arab south of the region.
One of five deputy secretary-general posts will go to Israel for at least a two or three-year period.