Serbia and Kosovo - who fought a war in the 1990s - have normalized economic ties, President Trump has announced, after meeting with the leaders of both countries at the White House.
As part of the deal announced on Friday, Serbia will controversially move its Israeli embassy to Jerusalem. The eastern part of the city is also claimed by the Palestinians as their capital.
Israel and Kosovo have also agreed to recognise each other's existence as legitimate states.
Serbian President Aleksandar Vucic and Kosovo's Prime Minister Avdullah Hoti also held talks with US Secretary of State Mike Pompeo.
The announcement has given Trump a diplomatic win ahead of the November presidential election.
Serbia's decision to move its embassy from Tel Aviv to Jerusalem is a nod to both Israel and the United States.
The Trump administration recognised Jerusalem as Israel's capital in late 2017 and moved the US embassy there in May 2018.
The administration has encouraged other countries to do the same but has been widely criticised by the Palestinians and many in Europe because the Israeli-Palestinian conflict remains unresolved.
Kosovo, a predominantly Muslim country, has never before recognised Israel nor has Israel recognized Kosovo.
The gestures to Israel are part of the Trump administration's push to support the Jewish state, which has included forceful denunciations of criticism of Israel at the United Nations and in other international venues.
Recently Trump helped to persuade the UAE to recognise Israel, ony the third Arab state to do so.