Nauru signed the agreement two weeks after Papua New Guinea made a similar deal with the Australian government in return for foreign aid.
Prime Minister Kevin Rudd hopes to deter an escalating number of asylum seekers who travel to Australia in rickety fishing boats from poor, often war-torn homelands through other countries such as Indonesia and Malaysia.
Rudd is soon expected to call an election for as early as Sept. 7. The surge in asylum seeker boat arrivals in recent years is a major political issue that is hurting the governing center-left Labor Party in opinion polls.
However, the boats have continued to arrive, carrying around 100 asylum seekers a day.
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"No matter where people smugglers try to land asylum seekers by boat in Australia, they will not be settled in Australia. This is our core principle," Rudd told reporters today.
"Those seeking safe haven will have the opportunity to settle and reside in Nauru," he said.
Nauru President Baron Waqa would not say how many refugees his tiny nation, which has fewer than 10,000 people and covers just 21 square kilometers (8.1 square miles) would accept.
"We will stand by Australia in making sure that this works, and not only that, that all of the refugees or asylum seekers that come through our camp will be treated humanely and with human rights upheld," Waqa said.
Sen. Christine Milne, leader of the influential Australian Greens Party, which argues that Australia should welcome all asylum seekers, attacked the latest deal.
"There's no way that Nauru can absorb a large number of people in a resettlement program, and tellingly the prime minister didn't say exactly how many he expected to be resettled on Nauru, and neither did the president of Nauru because, frankly, it's absurd," Milne said.
Opposition immigration spokesman Scott Morrison said the deal was aimed at winning Labor the election. He described the likelihood of refugees settling in Nauru as "remote."
Immigration Minister Tony Burke said Australia could strike similar agreements with other countries in the Asia-Pacific region to resettle refugees.
"I'm prepared to say there are other countries who have raised this with us as well," he said.