Nicaragua has restored diplomatic ties with Israel suspended nearly seven years ago when the Jewish state sent commandos to attack a flotilla carrying humanitarian aid to the Gaza Strip.
The normalization was announced by both countries in statements on Tuesday.
Nicaragua, which is led by former leftist guerrilla-turned-president Daniel Ortega, also recognizes Palestine as a state.
Ortega had ordered the suspension of ties with Israel in June 2010, after Israeli commandos raided the flotilla in international waters between Turkey and Gaza, killing 10 Turkish activists.
Israeli last year apologized to Turkey for the attack and agreed to pay $20 million in compensation. It also granted Turkey permission to send aid to Gaza.