The agreement gives Partner a year to give up the licence, after which Orange will also have the right to cancel it.
The deal is designed to give Partner time to carry out a market study and plan its future strategy under its own branding.
"The agreement provides for total payments of 40 million euros to Partner from signing the agreement until completion of the market study, and an additional 50 million euros should the (licence) be terminated within 24 months," Orange said in a statement.
Attempts by the French company to recover use of its Orange brand in Israel had led to major diplomatic strife after the head of the company, Stephane Richard, made comments that were interpreted as a desire to boycott Israel for political reasons.
On June 3, Richard told a conference in Cairo that he would break the relationship with Partner immediately if it was legally possible, which was seen as support for a Palestinian-led boycott campaign.
His comments came after French rights groups and unions accused Partner of building on confiscated Palestinian land, and urged Orange to cut ties with the company.
A furious Israeli Prime Minister Benjamin Netanyahu slammed Richard's comments as "miserable".
Richard later said his comments were misinterpreted and that he did not support any kind of boycott. He travelled for talks with Israeli leaders in a bid to smooth over the controversy.
The split with Partner was still welcomed by Palestinian groups on Tuesday, though Orange was criticised for taking so long.
"Five years have passed since the first warnings were given by unions on this subject," said the France-Palestine Solidarity Association in a statement.
"We deplore the fact that Orange did not publicly recognise the risks to human rights from its business relationship with Partner," it added.
- 'Amicable atmosphere' -
Orange, a partially state-owned French telecoms group, insisted the parting of ways was cordial.
Of around 30 countries in which Orange is present, Israel is the only market where the French company does not own the rights to or manage development of its brand name.
"The discussions were pragmatic, carried out in an amicable atmosphere and the two parties have reached a satisfactory mutual agreement," Pierre Louette, deputy chief executive officer at Orange, told AFP.
"We are pleased to have reached a new agreement with Orange further to our 17-year relationship with the brand and to have established a new framework for our future relationship with Orange," said Adam Chesnoff, chairman of Partner's board.
Given the considerable length of the initial agreement, Louette said striking a new deal had become inevitable.
"It was a situation inherited from a previous contract that gave a near-eternal right of usage" of the name, added Louette.
"We had a chance to regain the brand more quickly, which is a good thing."
Orange says its intention all along was to develop closer links to Israel, particularly related to research and development.
Richard is also suing over death threats against him and his family over the affair.