Mozambique's president signed a landmark peace deal with rebels in the capital Maputo on Friday, ending a two-year conflict that has rekindled memories of the country's brutal civil war.

President Armando Guebuza and Mozambican rebel leader Afonso Dhlakama, who came out of hiding Thursday, signed the deal in front of around 100 diplomats and dignitaries in a ceremony witnessed by an AFP reporter.

The two leaders embraced, prompting jubilant cries and clapping from those gathered.

Dhlakama came out of hiding Thursday, returning to Maputo in a symbolic end to the crisis, which had also scared off investors from Mozambique.

On Friday he hailed the deal as an "important step forward," but also accused the government of "intolerance".

"After the beautiful dream of two decades ago when peace seemed to be for always, we saw a systematic concentration of power in the hands of those in power... many are in this room," Dhlakama said, drawing gasps and mutters from the audience.

He added that he hoped "today's accord can bring to an end the one-party state".

For two years government forces and fighters loyal to Dhlakama have clashed, with the rebel leader accusing the state of reneging on a peace deal that ended Mozambique's brutal civil war.

Around one million died as a result of the 15-year conflict, which ended in 1992.

US Secretary of State John Kerry congratulated Mozambique for signing a peace deal, saying it was a "historic step forward" after a two-year conflict.

"Free, fair, and transparent national elections in October are a critical next step, which will help pave the way for a brighter, democratic future for Mozambique," Kerry added.

In recent clashes, Dhlakama's supporters attacked buses and cars on the main north-south highway and government forces raided his bush hide out, in a low-level but deadly insurgency.

On Friday, the two men led a minute's silence for those killed over the past two years.

The authorities have maintained a blanket of silence over the number of casualties, but civil society groups estimate more than 100 people have been killed.

"Today is a very important day for our people," Guebuza said.

"Our people waited patiently for this day, knowing solutions to our problems were to be found through dialogue."

Mozambique has been ruled by civil war victors Frelimo since independence.

The party is expected to easily win upcoming elections in October, but there are fears that the polls could be marred by violence.

Dhlakama has lost every presidential election since 1994 and his Renamo party is struggling to retain its status as the biggest opposition party.

The peace deal is to see Renamo fighters integrated into the military and the party given a greater say in election oversight bodies.

Dhlakama has also asked for a slice of the country's growing natural resource wealth.

President Guebuza said the government would set up a "peace and reconciliation fund" designed to benefit war veterans, but said it would not be a vehicle for handouts.