Australia is guaranteeing Tuvalu's security under a new pact as it pledges more than $110 million in a development package.
The memorandum of understanding was focused on sovereignty, Foreign Minister Penny Wong said.
It followed a signed treaty between the two countries, called the Falepili Union, that was criticised for eroding Tuvalu's sovereignty with a clause stating Australia must "mutually agree" to any security agreements struck with other countries.
Prime Minister Feleti Teo revisited the union after his election in February, acknowledging concerns about sovereignty.
Senator Wong said the new memorandum of understanding, signed on Wednesday night, represented a historic commitment to Tuvalu,.
Australia is also seeking to counter Chinese influence in the region as Beijing flexes its growing military might in the Pacific zone.
Under the union agreement, Australia will be obliged to come to the Pacific nation's aid and provide security guarantees.
"We are making commitments as Australia in response to Tuvalu's request that we have made for no other country previously," she said at a joint press conference with the prime minister in Tuvalu on Thursday.
"Principally, a very clear security guarantee as well as mobility pathway and the recognition of the continuation of sovereignty in the face of sea level rise."
Mr Teo is expected to progress the union this year.
Senator Wong and opposition counterpart Simon Birmingham travelled to Funafuti on a bipartisan visit to discuss security and climate change.
Australia would spend $50 million to help Tuvalu secure its first undersea telecommunications cable and a further $19 million would help extend the Tuvalu Coastal Adaptation Project.
There is another $10 million for direct budget support and the arrival of a Guardian class patrol boat will be fast-tracked.
The memorandum of understanding played a critical role in highlighting Australia's commitment, Mr Teo said.
"It's quite significant, the security guarantee that the treaty provides is something that is quite unique," he said.
"There will be one country Australia is legally obligated to come to the aid of and provide some security guarantees."
Both countries agreed the treaty "would not limit Tuvalu's liberty to enter into diplomatic relations with other states", according to a joint statement.
Under the treaty, Australia will offer permanent residency to up to 280 people from Tuvalu every year because of the threat climate-fuelled disasters pose to the low-lying island.
Senator Wong and Senator Birmingham met with Mr Teo and his cabinet to discuss the treaty.
It was Senator Wong's second visit to Tuvalu.
