NATO and Russia have approved the establishment of a joint council to deal with terrorism and other common threats as part of a plan by the alliance to reinvent itself by reaching out to its former foe, increase its capability to deal with new security challenges and expand its membership into Eastern Europe.

The creation of the NATO-Russia Council comes a day after the United States and Russia announced sharp cuts in their nuclear arsenals. NATO diplomats accompanying their foreign ministers at a two-day meeting in the Icelandic capital say the two deals mean the Cold War is finally over.

NATO Secretary General George Robertson says the new council will allow the alliance and Russia to work together in genuine partnership after a decade of ups-and-downs in their relationship.

"It is impossible to overstate the importance of this recognition that NATO and Russia must stand side-by-side in defense of our common values and interests in the face of the challenges of a new century," he said.

The first meeting of the council will be held two weeks from now at a summit outside Rome, to be attended by Russian President Vladimir Putin and leaders of NATO countries, including President Bush.

The council is tasked with drawing up a cooperative response to such threats as terrorism and the proliferation of biological, chemical and nuclear weapons.

Will the new arrangement between old enemies work after a decade of hostility and mistrust? That, says Mr. Robertson depends on the political will of the participants, who, in his words, are moving into uncharted waters.

The NATO-Russia deal is part of a concerted push by the western alliance to transform itself into a more agile organization that can field forces swiftly to wherever they are needed and sustain operations over time and distance. Secretary of State Colin Powell says it is urgent for the alliance to modernize it force structure and end its reluctance to operate outside of the Euro-Atlantic sphere.

"The kind of challenges that NATO may be facing in the future won't always be located in Central Europe, and NATO has to have the ability to move to other places," he said.

Mr. Powell also urged the allies to narrow the gap between their military capabilities and those of the United States by spending more money on such areas as strategic airlift, communications and intelligence.

"The United States, which has the largest defense budget of all, is continuing to add more money to our budget," he said. "We think that all of our colleagues in NATO should do likewise."

U.S. officials say Mr. Powell wants to prevent NATO from becoming a two-speed alliance, where the United States is able to act immediately with overwhelming military power while most of the allies are reduced to being spectators.

But European officials say it will be difficult to secure broad political support for an increase in defense spending in most countries.