"We are on the verge of some pretty robust sanctions that will stop them from fighting," Ugandan President Yoweri Museveni, who chairs a peace process for tiny Burundi, said after the cease-fire was sealed at an African summit.
Meeting in the northern Tanzanian town of Arusha, President Pierre Buyoya of Burundi's interim government shook hands with Pierre Nkurunziza, leader of the rebel Forces for the Defense of Democracy (FDD), after they signed the accord at a ceremony.
A summit statement said the FDD would become a political party, adding the FDD would also take part in "power-sharing arrangements of the transitional government" after discussions between the government and FDD about how this could be done.
The cease-fire was signed after months of haggling over the terms of a truce to end a conflict that has claimed 300,000 lives in the small central African country.
Burundi's civil war has pitted rebels from the ethnic Hutu majority against the Tutsi-led army.
A Burundi government sharing power between Hutus and Tutsis was inaugurated last year aiming to steer the country toward reconciliation and democracy.
But until this latest summit in Arusha the government had not managed to sign a cease-fire with either the FDD or the other main rebel group, the Palipehutu-FNL.
GIVE AND TAKE
"The signing is a victory for all of us. It did not come easily," Zuma said. "The principle of give and take was evident and we were able to produce an African solution."
The FNL was not invited to the summit because it refused to meet Buyoya for earlier talks in the Tanzanian commercial center of Dar es Salaam. Zuma said the group had set down too many conditions for participation.
The warring parties held talks last week in Dar es Salaam, but hit a deadlock on the presence of foreign troops in Burundi.
Museveni said he wanted the Hutu extremist FNL (Forces of National Liberation) to lay down their weapons.
"I appeal to the FNL to stop what they are doing. The region will not tolerate it. It is unacceptable," he said.
"If they don't we shall take actions against them," he added, referring to sanctions. Asked what the sanctions would be, he replied: "You will see."
The leaders of South Africa, Uganda, Ethiopia and Tanzania had arrived in Arusha on Sunday for a last-ditch effort to secure a cease-fire between the government and the FDD.
Ethiopian Prime Minister Meles Zenawi left Arusha on Sunday while South African President Thabo Mbeki and Tanzanian President Benjamin Mkapa left on Monday. The Arusha ceremony was attended by Buyoya, Nkurunziza, Museveni, South African deputy president Jacob Zuma and Tanzanian officials.
Although a minority in Burundi, the Tutsi ethnic group has maintained a stranglehold on both the government and army since independence from Belgium in 1962.
A three-year reconciliation plan launched in November 2001 turned Burundi's Tutsi-dominated administration into a Hutu-Tutsi power-sharing interim government with the ultimate aim of holding democratic elections.
Under the plan, Buyoya, a Tutsi, stays in power for 18 months, before stepping down in favor of a Hutu vice-president who will lead the remaining half of the transition.