Prime Minister Nguyen Tan Dung and German Chancellor Angela Merkel signed Tuesday a "strategic partnership" agreement to boost bilateral ties in five areas.
Merkel arrived in Hanoi Tuesday morning, beginning the first leg of her Asia visit, and met with PM Dung shortly after the reception ceremony.
The two leaders signed the Hanoi Joint Declaration which states five areas of cooperation, including politics and trade and investment.
The content of the declaration was discussed by the two sides over more than a year with eight rounds of talks.
Under the agreement, among other things, a "German House" and a subway route will be built in Ho Chi Minh City and a "Vietnam House" will be built in Berlin.
PM Dung told a joint press conference that there is still room to strengthen bilateral cooperation given the "fine" long-time relationship between the two countries.
Germany is Vietnam's largest trade partner in Europe, with bilateral trade turnover hitting US$4.1 billion last year.
There are around 100,000 Vietnamese people living and studying in Germany, according to German government statistics.
The two countries established diplomatic relations in 1975.
Merkel is scheduled to travel on Wednesday to Ho Chi Minh City before departing for Mongolia later in the day.