The deal followed weeks of tense negotiations to end a deep political crisis compounded by the veteran leader’s disputed and unopposed re-election in a widely condemned vote in June. Under the agreement, Tsvangirai will become prime minister.
Zimbabweans hope the agreement will be a first step in helping to rescue the once prosperous nation from economic collapse. Inflation has rocketed to over 11 million percent and millions have fled to neighbouring southern African countries.
Cheers greeted the signing of the deal at a Harare hotel by Mugabe, Movement for Democratic Change (MDC) leader Tsvangirai and Arthur Mutambara, who leads a breakaway faction of the MDC, the main opposition party.
But the ceremony was marred by supporters of the MDC and ruling ZANU-PF taunting each other and throwing rocks at opponents outside the venue where the signing took place.
Part of the fence around the hotel was trampled flat and police brought in two water cannons and a truckload of riot police. Police did not take any action.
The three smiling Zimbabwean leaders exchanged copies of the agreement and shook hands in front of South African President Thabo Mbeki, who brokered the deal, and other African leaders.
Mugabe, 84, made clear he would not tone down his attacks on Western countries such as former colonial power Britain. He accuses them of backing the opposition to drive him from power.
"African problems must be solved by Africans … The problem we have had is a problem that has been created by former colonial powers," Mugabe said after the signing ceremony, as Tsvangirai looked uncomfortable.
But Mugabe added: "We are committed to the deal. We will do our best."
WESTERN COUNTRIES WATCHFUL
Western countries are still keen to see how the deal works in practice, but the European Union said on Monday it stood ready to bring aid to Zimbabwe if the new government took measures to restore democracy and the rule of law.
British Foreign Secretary David Miliband welcomed the agreement but said its details would be studied carefully.
"The new government needs to start to rebuild the country. If it does so, Britain and the rest of the international community will be quick to support them," he said in a statement.
Under the deal agreed last week, Tsvangirai will become prime minister and chair a council of ministers supervising the cabinet. Mugabe, who has ruled since independence from Britain in 1980, will remain president and head the cabinet.
The deal is expected to split control of the powerful security forces that have been key backers of Mugabe.
The president, a former guerrilla commander, is likely to keep command of Zimbabwe’s strong army, but the MDC wants to run the police force. Mugabe’s ZANU-PF will have 15 cabinet seats, Tsvangirai’s MDC 13 and Mutambara’s splinter MDC faction three seats.
Analysts say the power-sharing deal is fragile and will require former enemies to put aside their differences and work closely to overcome scepticism, especially from Western powers whose financial support will be vital for recovery.
To gain the confidence of Zimbabweans, the new leadership must present a formula for knocking down prices and easing severe food, fuel and foreign currency shortages.
"While it might be too early to predict the first policy steps of the new government, we think tackling inflationary pressures by reducing the money supply should be one of the top priorities in addressing the country’s worsening structural economic imbalances," said Samir Gadio of investment bank Renaissance Capital.
"We expect changes at the Reserve Bank of Zimbabwe which was the chief architect of hyper-inflation through its persistent money printing."
ZANU-PF and MDC negotiators met early on Monday to allocate the 31 ministries. Names of the ministers are likely to be announced later in the week, a government official said.
There would also be a national security council, replacing a joint operations command of security service chiefs. The opposition says the security forces were instrumental in organising a campaign that intimidated the opposition into standing down for the presidential run-off, allowing Mugabe to retain power.