After 10 hours of tough negotiations, the two sides agreed that from now until the end of 2007, the rate of increase of certain textile exports will be fixed.
No specific figures were given, but the rates will be adjusted each year, increasing in 2006 and 2007 and paving the way for a completely free textile trade deal to bve in place by 2008.
The agreement will cover almost all categories proposed by the EU for possible restrictions.
EU trade chief Peter Mandelson said the agreement was beneficial to both sides.
"Today's agreement will give players on both sides clarity, certainty and predictability, and will also provide relief to developing countries' textile exports to Europe. It is an agreement therefore, that helps everyone's interest. It is a win win win agreement."
He added that the deal was a mutually acceptable way to bring about a smooth transition to free trade in textiles, although it still needed to be endorsed by the 25 EU member states. However Mandelson said he believed they would approve it.
Chinese and EU experts have been in talks for weeks trying to resolve the trade standoff.
Chinese Commerce Minister, Bo Xilai, praised the EU for resolving the trade issue through dialogue.
"In solving textile disputes, the EU is unlike some other countries. It doen't take unilateral actions, but seeks a proper solution through bilateral consultations."
Last month, Beijing decided to cancel export tariffs on textile goods, saying it was to relieve pressure on local producers, and the EU took the dispute to the World Trade Organization.
Meanwhile the United States last month imposed controls restricting the increase of imports of Chinese-made cotton trousers, underwear, synthetic fibre shirts and other goods to an annual growth rate of 7.5 per cent.
China and the United States both say they are still keen to solve the dispute without a trade war after a trip to Beijing by the US Secretary of Commerce Carlos Gutierrez and Trade Representative Rob Portman last week failed to resolve the issue.
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