The agreement announced by US President Donald Trump is a much-needed step towards ending the conflict, the prime minister and foreign minister said in a joint statement.
"Australia welcomes President Trump's announcement that Israel and Hamas have signed off the first phase of the plan to bring peace to Gaza," Anthony Albanese and Penny Wong said on Thursday.
"We urge all parties to respect the terms of the plan.
"There is a very long road to recovery in Gaza, securing long term peace and building the Palestinian state."
Mr Trump said Israel and Hamas had signed off on the first phase of his 20-point peace plan.
"All parties will be treated fairly!" the president said in a post on his online platform Truth Social.
"This is a GREAT day for the Arab and Muslim World, Israel, all surrounding Nations, and the United States of America."
Under the deal, Israel will withdraw its troops to an agreed line and is expected to relinquish its hold on the majority of Gaza.
The remaining Israeli hostages taken by Hamas on October 7, 2023 will likely be released from Gaza starting from Saturday, according to Israeli officials.
Almost 2000 Palestinian prisoners are expected to be released from Israeli prisons as part of the agreement.
Earlier on Thursday (AEDT), Mr Trump said he might travel to Egypt in the coming days to seal the agreement.
Opposition Leader Sussan Ley and her foreign affairs spokeswoman Michaelia Cash said the deal should "inspire hope" at home and abroad.
"All fair-minded Australians will welcome this announcement," they said in a joint statement.
"Today marks a hopeful first step towards the release of hostages held for over two years, the end of this war, and the beginning of enduring peace."
Liberal frontbencher and former Australian ambassador to Israel Dave Sharma said the Middle East shouldn't be Australia's main focus, but there could be a role for the government to play in the region.
"As this process becomes further advanced, we would be open-minded to ways that we could assist in a meaningful way," he told AAP.
Jewish groups have been supportive of the peace plan as it ensures the return of the remaining hostages.
The Australia-Palestine Advocacy Network has previously slammed Mr Trump's proposal, claiming it offers no justice or peace and fails to guarantee sovereignty for Palestinians.
The two-year war that has ravaged Gaza and inflamed community tensions in Australia was sparked by Hamas' attacks on Israel on October 7, 2023, which left around 1200 Israelis dead.
The militant group took 251 hostages, some of whom have been released in previous deals and some of whom have been killed.
Israel's subsequent military campaign in Gaza has killed more than 67,000 people, many of them women and children, according to local authorities.
The ongoing bombardment has been declared a genocide by a United Nations commission of inquiry, a finding disputed by the Israeli government.
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