It comes weeks after Belgrade and Pristina agreed to resume direct flights for the first time since the Kosovo War.
ADVERTISEMENTKosovo and Serbia have agreed to create rail and motorway links between the two countries in a huge diplomatic step for the region.
Representatives of both Balkan states signed a letter of intent on Friday during the Munich Security Conference.
The deal is the latest efforts to restore relations between the countries, which were torn apart in the 1998-99 Kosovo War that killed over 10,000 people and left more than one million homeless.
Kosovo declared independence from Serbia in 2008 but is not recognised by Belgrade.
The new agreement comes just weeks after the two countries agreed to resume direct flights between Pristina and Belgrade for the first time in more than two decades.
Kosovan President Hashim Thaci tweeted that the deal was a "great step towards reaching a final peace agreement."
Serbian President Aleksandar Vucic added that he was "happy to see progress" at the meeting.
"We feel that we will have a better future than this and that we will ensure peace for the coming decades," he said.
Both leaders thanked US President Donald Trump and US envoy for the negotiations, Richard Grenell, for their support and "resolve" in improved relations between the two countries.
Grenell, who also attended the meeting in Munich, stressed that talks between Belgrade and Pristina were now focused on economic development.
The precise details of the rail and road links are yet to be confirmed.
Railway connections between Serbia and its former southern province existed before 1990, when the whole region was part of Yugoslavia.
Earlier this month, Kosovo's new Prime Minister Albin Kurti vowed to “lead the Kosovo team in the future talks with Serbia.”
Discussions between the two had faced difficulties, with Kurti under pressure from US and EU leaders to rescind import taxes imposed on Serbian and Bosnian goods.
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