The deal, according to the senior official, reportedly calls for Israel to create a $20 million humanitarian fund as compensation to the families, which would not be released until Turkey passes legislation closing claims against the Israeli military for the deaths.
He said the deal would help bring "stability" to the turbulent Middle East.
However, in the Gaza Strip where about 1.8 million Palestinians have been under a crippling Israeli blockade for years, resident Khaled Nimer said the Turkish deal with Israel is "unfair" toward the Palestinian people.
Ankara has also committed to keeping Islamist movement Hamas, which runs the Gaza Strip, from carrying out military activities against Israel from Turkish territory, "including fundraising for such purposes", Netanyahu said.
"I'm sure this is an agreement that is good for both sides so I don't want to start quibbling on that but I will say this: the security naval blockade remains in place but we do enable cargo and materiel, and humanitarian material, to come from Turkey or from any other country to Israel".
The flotilla was blocked and stormed by Israeli forces, resulting in a fight with Muslim activists aboard the main ship, in which nine Turkish citizens were killed. Yildirim also said Turkey would work to invest in Gaza's energy and water sectors, which have collapsed after years of Israeli blockades and sporadic conflict.
Erdogan slams aid group for undermining deal with Israel
The break occurred due to the 2010 Mavi Marmara flotilla incident, in which Israeli naval commandos killed 10 pro-Palestinian activists after being attacked while attempting to board the Mavi Marmara, a ship funded by IHH, a Turkish NGO with known ties to Hamas and Al-Qaeda.
Turkey's move toward rapprochement with Israel comes amid its deepening isolation in the region following a breakdown of ties with Russian Federation and Egypt as well as the turmoil in neighboring Syria.
The announcement was made by both countries' prime ministers in separate announcements: in Ankara, and in Rome, where Israeli Prime Minister Binyamin Netanyahu was visiting.
Turkey plans on building a 200-bed hospital in Gaza while increasing the supply of electricity and drinking water, the Turkish official added.
The family of Hadar Goldin, one of the two fallen soldiers whose body is being held by Hamas in Gaza, on Wednesday slammed the Turkey deal as a "prize" for the terrorist group.
He said the Israeli blockade apparently will continue forever and it won't be completely lifted, adding "the Israeli siege imposed on the Gaza Strip is a political collective punishment to around two million Palestinians, but a lot of them are not involved in the whole plot".