Passenger trains that can reach speeds of 200 kilometres an hour will connect Abu Dhabi with Sohar in the north of Muscat, the Oman News Agency (ONA) said. Freight trains will run at up to 120kph.
The deal includes connecting the UAE's existing freight services line to Sohar, the sultanate's deep-sea port.
Oman Rail and Etihad Rail will establish a joint company to introduce and operate the railway network.
The agreement was signed by Shadi Malak, chief executive of Etihad Rail, and Abdulrahman Salim Al Hatmi, group chief executive of Oman's state-owned logistics company Asyad.
Under this agreement, the new company will lay the groundwork and work plan for the project, including its financial elements and schedule, and will also handle the design, development, and operation of the rail network, UAE state news agency Wam said.
Passenger trains will reach 200 kph, running between Sohar and Abu Dhabi in 100 minutes, and between Sohar and Al Ain in 47 minutes.
Freight trains, which run up to 120 kph, will have an annual capacity of 22.5 million tonnes of bulk cargo and 282,000 containers.
The company will receive investments amounting to about 1.16 billion Omani rials ($3bn). Wam confirmed a deal had been signed.
Speaking to ONA, Mr Malak said that the agreement “lays out a map for a sustainable project that will contribute to strengthening the solid relations between the UAE and Oman”.
In total, 16 agreements have been signed between the UAE and Oman so far. These are in the fields of energy, co-operation on transport, communications and logistics, maritime transport, and co-operation and investment in industry.
The Etihad Rail line will span approximately 1,200km. It will link 11 cities and areas across the UAE, from the border with Saudi Arabia to Fujairah in the north.
Last week, Etihad Rail signed four preliminary agreements with international companies for rail operations, maintenance and passenger stations.
Sheikh Mohamed and Sultan Haitham held talks on Tuesday that centred on the two leaders’ shared vision for a secure and stable region that promotes sustainable development and supports a thriving economy.
The leaders held a one-on-one session after the talks.