It will see BAE provide the Gulf state with 12 Eurofighter Typhoon aircraft and eight Hawk training jets.
As well as supplying aircraft, BAE Systems will provide in-service support to the Royal Air Force of Oman's (RAFO) operational tasks.
Work to start building the aircraft will begin in 2014, with the first jets due for delivery in 2017.
But the markets did not seem too enthusiastic about the announcement, as the BAE share price was down 2% during the early hours of trading.
More importantly for the company's future financial health is the Salam deal for 72 Typhoon jets with Saudi Arabia, worth £4.5bn.
Earlier this week, BAE warned that its 2012 earnings would suffer if no agreement was reached on this deal by February 21.
Last month, Prime Minister David Cameron visited Jordan, Saudi Arabia and the United Arab Emirates on a trade mission to promote BAE and persuade the states to buy British-made defence equipment.
It is unusual for a British prime minister to promote defence companies so openly but the Government is seeking to build closer ties with friendly Middle Eastern states in the face of what it sees as a growing threat in the region from countries like Iran.
The move also demonstrates an attempt to forge links outside of the traditional Nato countries.
The deal is not only important for BAE Systems but also for the companies that form the supply chain, many of which are based in the UK.
Cuts to defence budgets globally have resulted in a tougher and more competitive market, and BAE had hoped a merger with a company that specialises in civil aviation would lessen any effect of budget cuts.
Guy Griffiths, group managing director for BAE Systems' International business, said: "Receiving this contract is an honour and is excellent news for both BAE Systems and the Eurofighter Typhoon consortium.
"We look forward to working in partnership with Oman's Ministry of Defence, and the Royal Air Force of Oman, to ensure this is a highly successful programme that maximises the potential of both Hawk and Typhoon."
Oman becomes the seventh country in the world, and the second in the Middle East, to operate the Typhoon, joining the air forces of the United Kingdom, Germany, Italy, Spain, Austria and Saudi Arabia.
Business Secretary Vince Cable said: "This is obviously a very good day for BAE Systems, its suppliers and the broader Eurofighter supply chain.
"We, and our partners in the Eurofighter consortium are pursuing a number of opportunities at present and I hope that the decision by Oman to join the Typhoon family is followed by more of its friends and neighbours."
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