But the country's displaced people, while hopeful of it holding, are also suspicious about government motives.
The agreement came at talks between government officials and the Karen National Union in the state's capital Hpa-an, a report by the BBC said.
Both sides agreed to a cease-fire, to open communication offices and to allow passage through territories, a government official said.
The long-running fight with the Karen rebels is one of three major ethnic conflicts that have dogged the military which has ruled the country, formerly called Burma, for most of the years since independence from the British in 1948.
It may be hard convincing displaced Karen people, many living in makeshift camps away from areas where armed clashes have been intense, that the cease-fire is meaningful, the BBC said.
"We are probably seeing beginning of the end of the conflict with the Karen people," the head of the BBC's Myanmar service said.
"I think suspicions are still high on both sides. People on the ground in the conflict area, while they welcome the peace deal, are aware of the fragility of the agreement," he said.
"The new government is still the same people from the old regime. They have only exchanged their military dress for civilian."
Over the years, Myanmar's juntas have negotiated many cease-fires with rebel groups, but equally as many have crumpled.
Clashes with ethnic rebels in the states of Kachin and Shan states also are sensitive issues for the former junta leaders – now elected civilian government -- as it attempts to show the outside world the country is moving toward a democratic form of government.
U.S. Secretary of State Hillary Clinton said on a visit to Myanmar at the end of last year that an end to ethnic fighting is essential for normal relations with the United States.
There are signs that the government is moving towards a more conciliatory approach in relation with rebels in all three areas. In December the Myanmar government reportedly stopped military operations against rebel fighters in the northern Kachin state near the Chinese border.
Former military junta leader and now civilian Myanmar President Thein Sein told the army to shoot only in self-defense against the rebel Kachin Independence Army.
Also in December, a cease-fire was reached between the local government and another ethnic rebel group, the Shan State Army-South.
But signing cease-fires with rebel groups is only half the effort that will be needed to bring the country back from its dire economic situation, thanks to trade embargoes.
The government must address ethnic discrimination, rural poverty and giving the local population a greater share of rewards from exploitation of the region's natural resources have to be addressed.
In September, in an apparent attempt to win hearts and minds in rebellious areas, Sein suspended construction of the environmentally controversial Chinese-backed Myitsone hydro dam in Kachin State in September.
It remains to be seen how the Karen cease-fire agreement will change relations with rebels in Kachin and Shan states, if at all. All three groups shunned the government's separate cease-fire advances, accusing it of a blatant attempt to divide and rule.
The government newspaper New Light of Myanmar said the offer of peace talks was an "olive branch" to rebel groups fighting for more regional autonomy.
But members of the United Nationalities Federal Council, an umbrella organization of the rebel groups, said the government must negotiate with the the UNFC, the Irrawaddy news Web site said at the time.
"The government offer is contrary to our demand," Maj. Saw Hla Ngwe, a senior leader of the Karen National Union, said. "We want peace talks to include all ethnic armed groups, but the government is only offering to to talk with each group separately."
The UNFC, formed last year, includes the Kachin Independence Organization, the New Mon State Party and the Karenni National Progressive Party.
La Nan, a leader of the Kachin Independence Organization, said negotiations must involve all ethnic armed groups.
Nai Hang Thar, a senior figure in the New Mon State Party and secretary of the UNFC, said only group talks are acceptable, "Otherwise, we will only waste time and energy."
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