At the same time, US President Donald Trump has removed Sudan from the US list of state sponsors of terrorism, unblocking economic aid and investment.
Announcing the normalisation, Trump said "at least five more" Arab states wanted a peace deal with Israel.
The Sudan deal comes weeks after similar moves by the United Arab Emirates and Bahrain.
The two Gulf states became the first in the Middle East to recognise Israel in 26 years.
Sudan and Israel said in a three-way statement with the US that delegations would meet "in the coming weeks".
The countries would discuss agricultural issues, aviation and migration, it said.
A specific date for talks has not been announced.