Ban's four-member panel, to be chaired by former New Zealand prime minister Geoffrey Palmer and with outgoing Colombian President Alvaro Uribe as vice chairman, will include one Israeli and one Turk.
The identities of the Turk and the Israeli were not given, but the panel is due to begin work on August 10 and submit a first progress report by mid-September.
Israel's decision to back the panel was unexpected as it had for weeks insisted it would not cooperate with any international probe and instead launched two internal inquiries.
The about-turn followed contacts and consultations with a seven-member Israeli ministerial forum to ensure that "this was indeed a panel with a balanced and fair written mandate," Prime Minister Benjamin Netanyahu said.
"Israel has nothing to hide. The opposite is true," the Israeli leader said. "It is in the national interest of the state of Israel to ensure that the factual truth of the overall flotilla events comes to light throughout the world and this is exactly the principle that we are advancing."
Turkey hailed the UN probe, with Foreign Minister Ahmet Davutoglu saying it marked the first time that Israel had agreed to an international inquiry and showed that "all countries are accountable to international law".
Israel's decision to take part in the UN investigation "is a first," he told the Anatolia news agency. "As a UN member, Israel is a country that is answerable to the international community for its actions," he added.
The United States, through its ambassador to the UN, also hailed Ban's announcement.
Susan Rice expressed the hope that the UN panel "can serve as a vehicle to enable Israel and Turkey to move beyond the recent strains in their relationship and repair their strong historic ties."
She added that Washington expects that the panel will "operate in a transparent and credible manner and that its work will be the primary method for the international community to review the incident, obviating the need for any overlapping international inquiries."
Ban, who held last-minute consultations with Israeli and Turkish leaders over the weekend, said the panel would give him recommendations "for the prevention of similar incidents in the future."
He thanked the leaders of Israel and Turkey "for their spirit of compromise and forward-looking cooperation" which made possible what he called "an unprecedented development.
"I hope that today's agreement will impact positively on the relationship between Turkey and Israel as well as the overall situation in the Middle East."
UN spokesman Martin Nesirky stressed the enquiry was not a criminal investigation and said Ban would announce the names of the Turkish and Israeli panelists "in the next few days."
The panel, he noted, would review reports on ongoing national investigations by Israel and Turkey and would be empowered to request "clarifications and additional information" in line with international calls for a credible, impartial and independent probe.
The team would also be mandated with coming up with "findings about the facts, circumstances and context of the incident" and with deciding on steps required to prevent a recurrence of such incidents.
Ankara has urged the Jewish state to apologize, compensate the families of the victims and lift the blockade of Gaza to repair the relations.
Israel says its commandos used force only after they were attacked with sticks and stabbed as soon as they landed on the Turkish ferry Mavi Marmara.
In the wake of the incident, Israel significantly eased its blockade of Gaza, barring only arms and goods that could be used to create weapons or build fortifications, but it has maintained a naval blockade of the Strip.
Israel imposed the siege in June 2006 after its soldier, Gilad Shalit, was captured by Gaza militants and tightened it a year later when Hamas seized power in the coastal strip.
Last month, the Geneva-based UN Human Rights Council named its own panel of experts to probe whether the Israeli raid on the aid flotilla breached international law.
But Israel has signaled it will not cooperate with that probe because it views the Council as "biased."
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