The Ocean of Peace alliance, also called the Veitacini Treaty, means Fiji has become Australia's fourth formal ally, joining the US, New Zealand and Papua New Guinea.
Prime Minister Anthony Albanese and his Fijian counterpart Sitiveni Rabuka inked the alliance and a separate agreement, the Vuvale Union, in Suva on Monday.
It comes as China's military on Monday test-launched a ballistic missile from a submarine in the Pacific, according to state media.
Foreign Minister Penny Wong confirmed China had alerted the federal government that it intended to undertake the test.
The agreements with Fiji have been backed by a $1 billion commitment over the decade for initiatives covering climate and the economy.
The alliance has mutual defence obligations, stating an armed attack on any of the parties within the Pacific "would be dangerous to each other's peace and security as well as the security of the Pacific".
"It would act to meet the common danger, in accordance with its domestic processes," the text reads.
It also opens up the pact to other Pacific nations potentially joining.
"The parties may, by unanimous consent, invite any other Pacific state in a position to further the purposes and principles of this treaty and to contribute to the security of the Pacific," the treaty reads.
Mr Albanese described the two agreements as "one of the most significant endeavours Australia has ever undertaken".
"The significance of this agreement cannot be underestimated for what it means for our two great nations, and we are both stronger because of it," he told reporters at a joint press conference.
"The Ocean of Peace alliance introduces a mutual defence obligation, and there's no higher obligation than to come to each other's aid at a time of need."
Mr Rabuka said the Pacific must continue to assert its role as a "principled voice" for dialogue and respect for international law in an increasingly fragmented global order.
The Fijian prime minister said he expected other nations would seek to join the alliance.
"I'm sure right now there are other Pacific leaders who are waiting to come in. The more, the stronger, the better," he said.
It follows a proposal by Solomon Islands Prime Minister Matthew Wale for a Pacific-wide pact.
The list of agreements signed between Australia and other Pacific nations, form a key part of Canberra's diplomatic fight with China for influence in the region.
The Ocean of Peace alliance is the second signed by the Albanese government in a year, following the mutual defence pact struck with PNG in October called the PukPuk Treaty.
A long-awaited $500 million deal was also sealed with Vanuatu, called the Nakamal Agreement.
The coalition said it welcomed the alliance with Fiji, which establishes the framework for "a more regionally focused security pact".
A spokesperson from New Zealand's foreign ministry said the nation backed the alliance, which reinforced Pacific security being led by the region.
Ahead of the alliance's unveiling, the prime minister drank kava out of a shell during a traditional ceremony, finishing it in one go.
Mr Albanese thanked Mr Rabuka for the warm welcome and for honouring Australia.
"Our partnership is strong, from my Vuvale (family) to yours, Vinaka (thank you)."
Mr Albanese was also awarded Fiji's highest civil honour, being made an honorary Companion of the Order of Fiji.
The prime minister will next head to the Solomon Islands to meet with Prime Minister Matthew Wale after the two nations agreed to progress negotiations on a new treaty.
While visiting Honiara on Tuesday, the prime minister will participate in the Solomon Islands' 48th Independence Day celebrations.
