Armenian and Azerbaijani deputy foreign ministers initialed a draft peace accord in Tehran on Sunday amid reports of more bloodshed in the disputed enclave of Nagorno-Karabakh.
Russian and Iranian news agencies said the agreement, to be ratified by the leaders of the two former Soviet republics, was reached after two days of talks under Iranian mediation.
Iranian Foreign Minister Ali Akbar Velayati said the draft included a cease-fire, exchange of prisoners and bodies of those killed in the fighting and the lifting of economic sanctions.
"If these three proposals are implemented simultaneously, a very good opportunity would be brought about for a lasting cease-fire and honorable peace," the Iranian news agency quoted him as saying.
The agency said Velayati expressed hope the truce would be in place within a week.
More than 1,500 people have died in four years of fighting in Nagorno-Karabakh, and numerous earlier peace initiatives have foundered in fresh bloodletting.
Iran, which borders on both the Transcaucasian states, had made two unsuccessful attempts to reconcile the Christian Armenians and Muslim Azerbaijanis.
U.N. trouble shooter Cyrus R. Vance is due to visit the enclave, populated mainly by Armenians but surrounded and administered by Azerbaijan since 1923, during the week.
The draft agreement was reported signed by Azerbaijani Deputy Foreign Minister Albert Salamov and his Armenian counterpart, Armen Navasardyan.
Velayati also signed the pact, and the Russian ambassador to Iran was present at the final session of talks as an observer.
News agencies did not mention any representative of Nagorno-Karabakh's Armenian majority, which declared its independence from Azerbaijan after a referendum in December.
Armenia has insisted officially it is seeking only the enclave's independence. But nationalists in both Karabakh and Armenia see this as an interim stage before full unity.
Velayati told the Iranian news agency that Iranian Deputy Foreign Minister Mahmood Vaezi will travel to Nagorno-Karabakh as part of the mediation attempt.
Apart from Vance, mediators from the Conference on Security and Cooperation in Europe and the Organization of the Islamic Conference are due in the troubled region this week.
Azerbaijani officials Sunday reported more clashes in the undeclared war, saying two policemen were killed and seven officers injured when Armenian gunmen ambushed their bus.
Popular Front spokesman Okhtoi Gasimov said the attack took place just south of Shusha, the last significant town in Azerbaijani hands in the enclave.
The front, whose members comprise most of the Azerbaijani forces in the region, earlier said 10 people were injured when Shusha was shelled overnight.
Azerbaijan's news agency said Armenian irregulars have launched a broad offensive against six Azerbaijani villages.
There was no confirmation from the Armenian capital, Yerevan. But Armenian sources said two civilians were killed and two hurt when Azerbaijani gunners bombarded Nagorno-Karabakh's administrative center, Stepanakert, on Saturday.
Armenian forces have strengthened their hold on Karabakh in a series of offensives over the last month.