The pipleine will deliver 750 million cubic feet of natural gas per day from Iran by the end of next year.
The contract will be signed by Iran's Tadbir Energy and Pakistan Interstate Gas Company (ISGC) for engineering, procurement, construction and financing of the project, the Dawn newspaper reported.
Iran will provide a USD 500 million financing payable in 20 years and Tadbir Energy will lay the pipeline through its sub-contractors.
According to Pakistan Prime Minister's Advisor on Petroleum and Natural Resources Asim Hussain, the agreement, which had already been "initialled", was ratified by the cabinet on Wednesday, the report said.
Because it was a government-to-government agreement, there was no need for competitive bidding, he said.
Almost half of the remaining USD 1 billion financing will be arranged through a Chinese loan and about USD 500 million to be raised by Pakistan through gas infrastructure development cess (GIDC), Dawn said.
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According to an official statement, a committee comprising ministers for finance, law and justice, petroleum and natural resources and the governor of the State Bank of Pakistan was formed to further analyse the project.
An official said the committee would finalise a term-sheet with Iranian authorities for financing arrangement including mark-up and repayment details.
A gas sales and purchase agreement signed by the two countries about two years ago required the project completion by Dec 31, 2014.
Washington has been opposing the pipeline on the grounds it would inject foreign exchange into the Iranian economy.
Western nations have slapped Iran with a number of sanctions in an effort to prevent Tehran from going forward with its nuclear weapons programme.
However, Pakistan sees the pipleine as the shortest to get gas.