Chinese trade minister Gao Hucheng signed the agreement after talks with South Korean trade and energy minister Yoon Sang-jick, the Chinese Ministry of Commerce said in a statement (link in Chinese).
Trade between the two countries has grown rapidly to reach $290 billion last year, the statement said.
The significance of the agreement goes beyond goods and services, in promoting regional economic integration and establishing good diplomatic relations, Yoon said.
Discussions on the agreement started in May 2012 and most of the details were concluded in November last year.
The agreement will give South Korean firms greater access to the Chinese market and help create more than 50,000 jobs, South Korean ministry of trade, energy and industry (MOTIE) said, according to the China Post.
"In particular, exports of consumer goods in fashion, cosmetics, home appliances and high-end food products will increase greatly," MOTIE said in a statement, China Post reported.
The agreement removes tariffs on 71% of South Korean exports to China in 10 years and 91% in 20 years. South Korea will in return remove tariffs on 79% of Chinese imports in 10 years and 92% in 20 years, China Post said.
The agreement excludes many South Korean farming and fishery products, including rice, beef, pork, pepper and squid, as well as Chinese cars and display panels, China Post said.
South Korean President Park Geun-hye called the accord a "historic milestone" that would further cement relations in an open letter to Chinese leader Xi Jinping, China Post said.
"The Korea-China [free trade agreement] will ... take the bilateral ties that had been built over the years to a whole new level," Park said in the letter.
In a statement on the English version of its site, MOTIE said it would submit a bill to the South Korean national assembly for approval, and "carry out its implementation as soon a possible to bring its benefits to the country's people and companies".
The free trade agreement will come into effect either 60 days after both countries write to one another and confirm that they have completed "local procedures", or on a set date agreed by both parties, MOTIE said.
According to the Korea International Trade Association (Kita) around 70 Korean companies in South Korea and China took part in a Shanghai trade fair earlier this year. Expectations among firms attending from both countries have "gained momentum" in anticipation of the FTA, Kita said.
Kita’s senior executive managing director Kim Moo-han said: "China has boundless potential as a consumer market.