The government began the process of privatising IMI Systems, formerly known as Israel Military Industries, in 2013.
The firm manufactures the iconic Uzi submachine gun and the Galil assault rifle. It also manufactures armoured vehicles and trains security agents.
The $495 million price (1.8 billion shekels, 435 million euros) will be supplemented by a further $27 million if IMI meets agreed performance goals, Elbit said in a statement.
Israeli Prime Minister Benjamin Netanyahu welcomed completion of the deal.
"Today we are at the end of a long and important process that began several years ago," Netanyahu said in a statement.
"The sale of IMI to Elbit will facilitate the advancement of the Israeli defence industry, will leverage Israel's technological abilities, and will increase defence exports. All of these will directly contribute to the Israeli economy."
Elbit CEO Bezhalel Machlis said "the synergy between the capabilities of the two companies and the global positioning of Elbit Systems will enable us ... to realise the potential of the technologies of IMI in the international arena".
Israel was the world's sixth-largest defence exporter in 2017, according to industry analysts IHS Markit.
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