The agreement establishes a council of officials from both nations to coordinate policy. A weaker body of officials already exists under a different name.
The agreement also proposes the eventual merger of the two countries' currencies, but does not set any time frame.
Authoritarian Lukashenko harshly criticized the draft agreement when it was published in October, saying it would barely change the status quo, but later toned down his objections.
During the signing ceremony at the Kremlin Wednesday, Lukashenko again made it clear that the agreement falls well short of his expectations.
Â"This is not the last agreement we will sign with Boris Nikolayevich,Â" he said with a smile, looking at Yeltsin. Â"We shall still sign the treaty which the people of Russia and Belarus expect from us -- the treaty on a unified state.Â"
Yeltsin then read a prepared text, hailing the agreement as a breakthrough.
Â"The union state is based on the sovereignty and independence of member nations and isn't directed against anyone, even (President) Clinton,Â" he said.
The remark reflected the current tensions in Russian relations with the United States. Mr. Clinton strongly criticized Russia's military action in breakaway Chechnya earlier this week.
Later in his remarks, Yeltsin lost his place in the text he was holding in his hands, and he slowly sorted through his papers as the crowd remained silent for several awkward seconds.
Â"Is that the end?Â" Yeltsin asked, turning to Lukashenko.
The Russian president, who was delivering his speech standing, nearly lost his balance and Lukashenko put up a hand to support him. Kremlin protocol chief Vladimir Shevchenko then rushed up to the president to help him find his place in the speech, and Yeltsin finished his sentence.
The agreement was initially scheduled to be signed Nov. 26, but the signing was postponed when Yeltsin fell ill with what doctors said was acute bronchitis and later turned out to be a bout of pneumonia. Yeltsin was discharged from the hospital Monday and was set to leave for a two-day trip to China later Wednesday.
Moscow has moved cautiously on Lukashenko's idea of creating a single state, fearing that the Soviet-style Belarusian economy would be a heavy burden for Russia, which is struggling with its own economic problems.
Many Russian politicians are also concerned by Lukashenko's unpredictability and his ambition to become leader of the unified state.
The Russian parliament's lower house, the State Duma, is scheduled to meet Monday to ratify the treaty.
By Vladimir Isachenkov
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