The deal seeks to put an end to a conflict that goes back decades
The Philippine government and a separatist rebel group have agreed to expand an autonomous Muslim region in the south of the country.
The agreement envisages the extension of the present region in Mindanao to include a further 712 villages.
The proposed homeland will also be entitled to a large share of the resources in the area.
But the deal - agreed in secret talks with the Moro Islamic Liberation Front (MILF) - remains subject to approval.
Formal talks began in 2003 after MILF, which is thought to have around 11,000 members, signed a fragile truce with President Gloria Macapagal Arroyo's government.
It is the largest of several Muslim separatist groups battling the government in the predominantly Catholic country.
Details of the agreement struck in talks in the Malaysian capital, Kuala Lumpur, were revealed to reporters by Hermogenes Esperon, a "peace adviser" to President Arroyo.
"The government has agreed to grant broader political, social and economic power to the Muslims based on a deal we have reached with the rebels in Malaysia," Mr Esperon said, according to Reuters news agency.
"The final political solution will still be negotiated, and, if needed, we will amend the constitution to reflect what was agreed upon with the rebels," he added.
The proposed Muslim homeland would expand on an autonomous territory in the south of the mainly Catholic Philippines that was created in a deal with a previous Muslim rebel group, the Moro National Liberation Front (MNLF).
Administrators of the new zone would be empowered to collect about 75% of taxes from oil, mines and fisheries in the area, Mr Esperon said.
Government and MILF negotiators are set to meet on 24 July to finalise the draft agreement and to set a date for the signing of a final deal, subject to further talks.
A plebiscite of the 712 affected villages should take place within six months of a deal being signed.
Analysts caution that significant obstacles stand in the way of a final deal.
Nonetheless, President Arroyo applauded the progress made.
"When peace comes to Mindanao, speedy and just progress will also come," she told Philippine radio, according to Associated Press.