The agreement builds on a relationship between two manufacturers in Australia where Thales builds the Steyr Mannlicher F88 assault rifle for the Australian military.
A statement from Thales Australia said the companies "will refresh their longstanding cooperation in military markets with Thales Australia taking the formal lead in Australia and New Zealand."
Chris Jenkins, Thales Australia's chief executive, said the agreement is a boost to Thales' Soldier Systems business.
"Steyr Mannlicher has a long history and a global market outlook," he said. "Combined with our expertise delivering and upgrading infantry weapons, it will allow us to collectively build on our vast knowledge and networks to offer streamlined, cost-effective solutions to customers.
"We have invested significantly in weapon development in Australia and are eager to offer Australian innovations through Steyr Mannlicher to the rest of the world."
Jenkins said the work between Steyr and Thales Australia on the next generation weapon under the LAND 125 3C program "is the most recent example of the innovative work being done at Lithgow."
Under the LAND 125 program, Thales Australia won an $8 million contract in October to upgrade the Steyr F88 rifles in use by the military and made at the Thales factory in Lithgow, New South Wales.
The improved rifle is lighter and better balanced, the Ministry of Defense Materiel said.
It is fitted with NATO-standard Picatinny rails, which allow additional fittings such as sensors, illuminators, sights and aiming devices, including thermal imaging optics. There also is an integrated grenade-launcher attachment and sight.
The F88 AUG -- Armee Universal Gewehr -- is a 1970s-era bullpup 5.56mm assault rifle. It was designed Steyr Mannlicher and for more than 30 years has is issued to the Austrian army. It is also standard issue for some state police forces.
Australia adopted the rifle in 1985 and Jenkins said Thales began cooperating with Steyr in 1986 on a manufacturing program.
"The F88 SA2 currently in service demonstrates the continuing evolution of this capability," he said.
The F88 SA2 incorporates a re-modeled sight that includes multiple Picatinny rails as well as a re-colored stock and carbon coating of the external metal components.
New Zealand uses the Australian version of the F88, importing them from Australia. However, when New Zealand opted for the rifle in 1988, the first 5,000 weapons it ordered were manufactured in Austria by Steyr-Daimler-Puch.